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September 18, 2008

The Triumph of the Very Rich? William D. Rubinstein on why the TUC are wrong about the very wealthy

Posted by William D. Rubinstein

William D. Rubinstein - professor of modern history at the University of Wales-Aberystwyth and author of Men of Property: The Very Wealthy in Britain since the Industrial Revolution and co-author of The Richest of the Rich - explains why the TUC are wrong about the very rich.

At its recent annual conference, the TUC proposed higher rates of income tax on anyone earning more than 100,000. Of course: they would, wouldn't they? But what makes this particular proposal more interesting than most is the evidence they used to justify their suggestion.

According to a new TUC study, Do the Super Rich Matter?, published to coincide with the conference, the super rich in Britain today are now, for the first time in many decades, as rich or richer in comparative terms than were the very rich in the Victorian or Edwardian periods. The 28 billion fortune of Britain's current richest man, steel magnate Lakshmi Mittal, now far exceeds, when inflation is taken into account, the previous top fortunes of the past 150 years, those of Sir John Ellerman (37 million in 1933) and the first Duke of Westminster (14 million in 1899).

I have not seen the TUC's report, but it is difficult to believe that it is not based in large measure on my historical research on the very rich, together with Philip Beresford's Sunday Times Rich Lists. Philip Beresford and I collaborated on a historical guide to the richest-ever Britons, The Richest of the Rich, published last year by Harriman House and the Social Affairs Unit. Since no one besides us has conducted research on this subject, I assume that the TUC is relying on our statistics in its report. I am therefore well qualified to comment on what the TUC has found and proposed.

Their central claim is that today's super rich - at least before the current financial panic and economic gloom - are richer than ever in modern times. In this, they are partly right but mainly wrong. It is perfectly true that, for most of the twentieth century, the level of wealth of the very rich has declined in real and even in current terms compared with the pre-1914 period, a product of continuing high taxation and a relative absence of economic opportunities in either international finance and trading or in manufacturing for export, areas at which British entrepreneurs have been notably successful in the past.

The continuing decline of the very reach probably reached its nadir in the 1950s. In 1953, as unbelievable as this might seem, one Inland Revenue officer claimed that there were only 36 millionaires in Britain (compared with a thousand in 1939), that is, only 36 persons in Britain with an after tax income of 6,000 or more, representing a pre-tax income of 56,000, the approximate return on wealth of 1 million. At the time, anyone who left a vast sum for probate, like the second Duke of Westminster, who left 10.7 million in 1953, automatically lost three-quarters of it (less, however, for landowners) to the taxman.

This decline, which was paralleled in America and elsewhere, was chiefly the product of several decades of extraordinarily high levels of taxation, at a time when the rich were unable easily to move their assets abroad or hide them. This situation was reversed in the 1960s, when top fortunes began to grow again, and has obviously been totally reversed since the 1980s. To that extent, the TUC report is quite accurate.

But there are a number of important caveats to be made about its conclusions.
The TUC evidently used inflation as its means of measuring relative wealth, but there are other ways of comparing wealth levels at different historical times. In common with historians of this subject outside of Britain, we compared the level of wealth of the very rich with Britain's NNP at the time of the death or maximum wealth of those on our list. Using this measure shows that while the very rich have certainly increased in relative terms during the past decade, they still have some way to go to match the richest of the past.

Secondly, common sense shows that today's mega-rich simply cannot live in the lifestyle of the super-rich of a century or two ago. During the nineteenth century, dukes and earls, and the richest merchant bankers and manufacturers lived literally like princes, with grandiose stately homes in the country, huge mansions in Mayfair, and armies of servants to dance attendance on their every whim. A stately home like Blenheim or Chatsworth, or one of the many aristocratic mansions in London like Devonshire House or Londonderry House - most of which were pulled down and turned into hotels and offices after 1918 - routinely employed fifty or more servants and, from surviving photographs and accounts, showed Buckingham Palace a clean pair of heels in terms of rampant luxury, routinely holding art collections which would now be worth billions.

In central London some sense of what this world must have been like can be gleamed by visiting the Wallace Collection in Manchester Square, formerly known as Hertford House and the home, in bygone times, of the Marquesses of Hertford and their heirs. Arguably, apart from royalty there is literally no one in Britain today, and possibly no one in the Western world, who can live like this, even the richest of the rich list. Nor would anyone want to live in a house with fifty servants run as a museum, a continuing imposition on one's privacy and independence.

Before the First World War, a very large percentage of M.P.s, especially in the Tory party bust also among the Liberals, were drawn from the sons and heirs of wealthy aristocrats and from the plutocracy, while the House of Lords, then almost wholly hereditary, was far more important than it is today. At the present time, the nexus between wealth and political power is certainly much more tenuous than a century ago, at least in a direct sense. In these respects among others, the central point made by the TUC report appears to be misleading.

But the TUC report also advocated heavier taxation on "the rich", the "rich" being defined as those with an income of 100,000 or more. A moment's consideration would show that this is a kind of sleight of hands of the previous claim that the rich are richer than ever. An income of 100,000 today obviously does not make one "rich", merely affluent, if that. Assuming that Lakshmi Mittal is really worth 28 billion, and that his income is only five per cent of his wealth, then the fortunate steel magnate enjoys an income of 1.4 billion a year, approximately 14,000 times the threshold at which the TUC defines the "rich" and intends to increase their tax liability.

The thousandth richest person on the 2008 Sunday Times Rich List was, according to it, worth 80 million, a total owned by thirty-three different people.. Again, assuming that its fortunate holders received only five per cent of this total in income, they enjoy an income of 4 million per year, forty times the minimum cutoff point for higher taxation urged by the TUC.

It is not, perhaps, realized how today some rather ordinary members of Britain's upper middle classes earn 100,000 or so and do not feel themselves to be in any way "rich", especially if they already pay the legal amount of income tax due in full to the tax man. The base salary for an NHS G.P. with ten years of experience is 110,000. I am not arguing with this: I am sure that
they deserve every penny. But I would also be rather certain that few of these G.P.s feel themselves to be "rich", and many are struggling, just like you and me.

In proposing to tax them, archetypal members of the upper middle class, the TUC is, of course, extending its range of targets far from the stinking rich. They must do this, since if income earners at this level are left as they are, the Treasury will not earn very much extra money. Moreover, the TUC report ignores the ability of the true super-rich today to up stakes and go abroad, taking all or most of their wealth with them, probably in a fraction of a computer screen second. All in all, a bad idea. Indeed, there is a strong case for lowering the top marginal rates of taxation before virtually everyone in Britain finds themselves in the 40 per cent bracket.

William D. Rubinstein is professor of modern history at the University of Wales-Aberystwyth. He is the author of Men of Property: The Very Wealthy in Britain since the Industrial Revolution, (Social Affairs Unit, 2006) and co-author of The Richest of the Rich: The Wealthiest 250 People in Britain Since 1066, (Harriman House, 2007).

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