Today’s economic system greatly benefits the richest at the expense of the middle and working classes. The system is sometimes justified by theories that have been proven false. A review of the evidence shows how these myths are not simply wrong, but also harmful.
Myth No. 1: The market works best with no government intervention
The first myth, and maybe the most common one, is the theory that the best way to ensure prosperity for everyone is by limiting government intervention and allowing the market to operate unhindered.
This philosophy is sometimes called laissez-faire economics, a French term that translates as ‘let it be.’ The foundation of this view is that markets are the most efficient way to allocate all resources, and any interference with markets and their operation will result in economic losses for society. Governments, then, should do as little as possible – in taxation, regulation, or service provision.
As most of us know from our own experience, however, it’s not that simple. Competition in free markets only works as advertised if no one has enough power to set prices. The power to influence prices can come through market share, or through unequal information between buyers and sellers. The closer a market is to a monopoly (only one seller), or a monopsony (only one buyer), the more unfair outcomes will be, and the greater the opportunity for profit — usually through a combination of underpaying workers and overcharging consumers, or through exploiting others lacking power.
During the so-called free-market era starting in the early 1980s, governments reduced regulations, slashed corporate taxes and taxes on wealth, weakened labour protections, reduced social transfers, and generally shaped markets to benefit the few. The results of this global experiment are clear. A “free market” will always distribute more wealth to the top, because people at the top always end up with more power and influence. We need a neutral actor to intervene and put a stop to extreme inequalities and redistribute wealth fairly across society.
Myth No. 2: Increase the size of the pie, and everyone will benefit
The second myth is if the economy grows – measured by gross domestic product (GDP) – everybody will benefit because they’ll get a bigger slice of the pie. This myth claims that government should focus on growth and not on wealth redistribution, because redistribution is simply taking some of the existing pie from the better off to give to others.
But big corporations may grow their “productivity” by finding ways to pay workers less for the same output, or by turning to automation. Either way, their gains come out of workers’ pockets. A corporation’s growth does not necessarily mean more jobs or higher wages for workers. Usually, rich CEOs and shareholders reap most of the benefits of that growth. In 2019, the average CEO in Canada earned more than 200 times the average worker’s pay – a dramatic increase from 1998 when that ratio was 104:1.
A pie is also a bad metaphor for how the economy actually works. Economist Kate Raworth has used an analogy of a doughnut – with the outside of the doughnut representing finite natural resources and the inside representing our social foundation. Any model that removes people, unpaid care work, public infrastructure and our natural environment from an understanding of the economy is bound to come out with the wrong answers.
Myth No. 3: The “trickle down” of wealth from the top benefits everyone
The third myth we often encounter is that if we cut taxes for the richest or for big corporations and make them better off, the benefits will “trickle down” to the rest of us. Investors and corporations will reinvest their tax savings, create jobs and grow our economy.
A study by London School of Economics economists David Hope and Julian Limberg, published in December 2020, analyzed more than 50 years of tax cuts for the richest in 18 of the major European and North American OECD countries and found very conclusively that the trickle-down theory is false. Tax cuts don’t stimulate growth or create jobs, they just increase inequality.
If we want to improve the quality of life of everyone in Canada, including the richest among us, we need to ensure that the wealthiest individuals and big corporations pay their fair share, instead of giving them more money.
Myth No. 4: Taxing the wealthy constitutes theft
The myth that raising taxes on the wealthy is a kind of theft rests on the premise that these people deserve to keep their money because they worked for it, earned it, and should not be taxed more just because they have been successful. The super-rich themselves often argue we should not ask them to pay more, because they created our jobs and wealth (see Myth 3, above); they often threaten – implicitly or explicitly – to leave the country if they have to pay more.
Governments have shaped markets to allow this extreme accumulation of wealth, at the expense of the rest of us, and they have a responsibility to rewrite the rules to make the system more fair. Businesses benefit from important public infrastructure such as roads, railways, ports and airports, but they also benefit from government-sponsored social programs. In other words, the government does not steal money from the richest when it collects higher taxes; it collects a return based on the contribution of public infrastructure to private profits.
Changing the system
These myths are persistently cited despite clear evidence that they are false. They are used to deny inequality or justify inaction, which in today’s world rivals climate denial as an effort to deflect action on issues that demand urgent attention. Those holding great wealth and power have no interest in changing the system; indeed, they will fight such efforts. If we want to change things, there is a lot of work to be done.
This is an excerpt from Angella’s new book Share the wealth! How we can tax Canada’s super-rich and create a better country for everyone, co-authored with federal New Democratic Party Director of Policy Jonathan Gauvin. Want to read more? Ask your public library to order a copy or consider ordering one through a local independent bookstore.