Prof. Witold Orłowski, polish economist: The world has gone too far in lowering taxes for the rich

Christine Lagarde (IMF) conducts a radical critique of contemporary capitalism in her speeches. How to fix the contemporary model of capitalism? Who can carry out such a repair, in whose interest it would be carried out?

The free market is the only economic mechanism known to us that leads to sustainable economic growth and prosperity. But there is also no doubt that it does not always work perfectly. People are very inventive, but they can also overuse the freedom that the market gives them. For example they can give in to lemming-like rush by taking on excessive risk, creating dangerous financial instruments that can lead to a crisis. However, the simple image of the invisible hand of the market correcting all human errors and human egoism created by Adam Smith turns out to be a bit too naive. If we want the overwhelming majority of people to have the impression that they benefit from development, appreciate the advantages of the free market and support it, we must agree to adjustments to the operation of modern capitalism. After all, the adjustments that were introduced almost a century ago, after the Great Depression, stabilized capitalism and democracy for several dozen years. This, of course, is primarily a task for politicians who in democratic countries have a mandate to do so. But it is worthwhile for these politicians to be guided not by electoral support bars, but by reliable knowledge and analysis.

Thomas Piketty is a critic of the contemporary model of capitalism. In his book „Capital of the 21st Century”, he claims that inequality is increasing because income from capital is growing faster than income from work. Government intervention should be increased and capital incomes should be taxed. What would be the effects of implementing his demands, or maybe Piketty only provides “fuel” to populists?

Piketty didn’t discover anything big, the market economy is characterized by people having different incomes. In my opinion, Piketty is wrong about that there is no excessive increase in the share of income from capital in GDP. Some increase is understandable: after all, savings are increasing in relation to GDP, so it is understandable that they bring more income. There is another important aspect to this: nowadays most of these savings do not belong to a small group of rich people, but to hundreds of millions of middle-class people, as well as relatively poor people who are saving for their retirements. But this does not mean that really high income should not be taxed higher. The world seems to have gone a little too far in lowering taxes for the rich, since Warren Buffet has calculated that he pays a lower percentage of tax than his secretary.

Recently, the view that economic growth is not the most important thing has been very popular, all people must take advantage of prosperity, excessive differences damage the society.

The pendulum used to always go too far… When world growth slowed down in the 1970s, a neo-liberal revolution occurred. In Western countries, tax progress has been commonly lowered, and the focus has been more on creation than on division. Of course, the welfare state remained, but it’s scale was somewhat reduced. The effect of this was indeed an acceleration of development, but at the price of an increase in income inequality. Perhaps it’s time for a correction. Not so much for economic reasons, but for social and political reasons. Because if half the population is frustrated and thinks they are not getting enough out of the fruits of growth, very strange situations can arise at the time of the election. And that could be a threat to all of us.

Could an increase in redistribution solve the problem of inequality? Or maybe the increase in redistribution is simply the greater power of politicians?

Of course, increasing redistribution also means more power for politicians. After all, there is nothing nicer than giving away money. But on the other hand, there are also serious reasons to think about it. If a large part of society is frustrated, it creates a powerful threat to development. On the issue of redistribution, there is no alternative but to seek a reasonable compromise. But a reasonable compromise also means that it is necessary to look for redistribution methods that are the least distorting the operation of the market. People must be given the most equal opportunities, and redistribution activities should encourage them to be active. There should be no inactivity rewarding. For example, a lot of money spent on improving education or health care is also an element of redistribution. Although less attractive for politicians, because nothing influences the election result as much as cash sent without any conditions from a good uncle.

The last 30 years have led to a tremendous increase in the wealth and power of finance capital. How should the financial sector change to be able to better serve the economy and fulfill it’s mission?

The financial sector is an indispensable intermediary between those who have savings and those who have an idea how to invest these savings and turn them into capital. The main problem is that there is a risk involved with every investment, and experience has shown that the more complex the financial instruments are, the more difficult it is to see the risk. I believe that the first task for regulators is to prevent the increase of market opacity, which is precisely the situation where we are not able to massively assess the risk. Perhaps some extremely risky operations should be banned. Although it certainly should not be allowed to expose people’s savings for pensions or the finances of those taking a huge mortgage to excessive risk. It is not about regulation for the sake of regulation. But the financial sector itself should be interested in reforms that will reduce the risk of future crises.

Prof. Witold Orłowski

Member of the Club’s Board, economist, member of the Economic Council to the Prime Minister, Head of the Economic Advisory Council to the President of the Republic of Poland 2001-2005.

Founder of the Independent Center for Economic Studies NOBE, 2002-05 Head of the Economic Advisory Council to the President of the Republic of Poland, lecturer in macroeconomics, author of many scientific books and publications in this field. Since 2003 Director of Warsaw University of Technology Business School.