Do we live in an accidental plutocracy?
As rumours circulate that the government is wobbling on some of its plans for tax reform in this month's budget, we ask whether the wealthy exert too much influence on political decisions in the UK
Next week, the Fairness Foundation is publishing a Wealth Gap Risk Register that will lay out the evidence for the ways in which wealth inequality in the UK is damaging our economy, society, democracy and environment, and what we can do about it (sign up for the launch webinar at 1pm on Tuesday 15 October here).
The complexity scientist Peter Turchin has argued that in his book End Times (watch our event with him here) that when history repeats itself, one tune in particular is at the top of the playlist:
When the scales of power heavily favour the ruling elite, it leads to a surge in income inequality, enriching the wealthy and impoverishing the less privileged. As more individuals aspire to join the elite, dissatisfaction with the established order intensifies, often resulting in calamity.
Plutocracy - government by the wealthy - is a milepost along this road to societal dysfunction (and worse). Turchin argues that the US is already a plutocracy, citing evidence of the impact of wealthy vested interests on US policymaking over decades, and suggested during our event that the UK is not far behind.
Few would argue that British democracy has eroded to the extent that ordinary people no longer have any say in what the government of the day does in their name. But it would be hard to mount a convincing case that there’s a level playing field when it comes to influencing government policy. The public intuitively understands this, as evidenced in declining levels of trust in politicians and government (discussed in a report published today by Demos).
Let’s take a recent example of the influence of wealth on the political process. At the spring budget in March 2024, the Conservative government announced plans to abolish the current tax regime for non-UK domiciled individuals (non-doms) and to replace it with “a modern, simpler, fairer and competitive residence-based regime”. Unusually, the Treasury then launched no fewer than ten ‘listening events’ in May of that year to hear the views of stakeholders on the proposed changes.
According to people who went along, each of these events was attended by a large number of lawyers, accountants and so on, representing the interests of wealthy non-doms who would be affected by the changes, and pushing back against the proposals, and (at most) one person making the opposite case in favour of scrapping the scheme.
Fast forward seven months, and the new Labour government, which had made a manifesto commitment to go one step further than the Conservatives by closing some significant concessions and loopholes in their plans, is wobbling on whether to stick to these plans in this month’s autumn budget.
The main cause of this wobble is a concern that the plans might cause many non-doms to leave the country, wiping out much of the anticipated extra tax revenue. However, a study of behavioural responses to recent changes to the non-dom scheme suggests that the size of the feared ‘wealth exodus’ would be tiny, with about 5% of people affected leaving the country in an average year anyway, which might increase to 10% as a result of changes to the non-dom regime (a very small number of people, who are likely to be those paying the least tax anyway).
If the evidence doesn’t suggest that there are valid grounds for concern, why are our politicians getting cold feet? Could it be to do with the intensive lobbying and pushback coming from the wealth defence ‘industry’ (made all the more effective by the lack of a strong positive vision from the government)?
When we asked the public what they thought about wealth inequality last year, 75% (including 72% of 2019 Tory voters) said they were concerned that very wealthy people have too much influence on the political system. This has real political consequences (Liam Byrne MP has recently written about how wealth inequality drives support for populism).
The backlash to the non-dom changes seems like a prime example of the wealthy exerting their power and influence to frustrate or water down attempts by elected politicians to reform the system in ways that would benefit the majority at their expense (and there are others, such as the lobbying behind a similarly motivated ‘wobble’ about scrapping the carried interest loophole for private equity).
A key problem is that, when you have a society with large levels of wealth inequality, this imbalance of economic resources almost inevitably spills over into an imbalance of political influence and power.
A consultation process, such as the one on non-doms run by the Treasury in May, doesn’t need to be designed to be unfair in order to achieve an unfair outcome. People and organisations can use their wealth to buy armies of advocates, and thus tilt the balance of argument in their favour, sucking the oxygen out of attempts by others to challenge the dominant narrative that wealth defenders have constructed over years of lobbying (example: any attempt to increases taxes on wealth will end up costing the country money, because all the rich people will move to Monaco). Anyone can take part in the consultation process in theory - but even if there are no formal barriers to entry for non-wealth-defenders, that doesn’t really help in practice when assymetrical resources mean that the voices in the room making one argument outnumber their opponents by twenty or thirty to one.
Recent public scandals, such as Partygate or the recent furore over donations to Labour politicians, have hinged on the (accurate) public perception that there’s one rule for them and another for the rest of us - a lack of fair process. The complication is that, because a high degree of wealth inequality means that you don’t start with anything like a level playing field, you can have a process that looks outwardly fair, but does not deliver fair opportunities or fair outcomes in practice.
With this in mind, there are only two ways to ensure that everyone has the same opportunities to influence decisions made in their name, and to make our democracy a system worthy of the name. The first is to reduce the level of wealth inequality, for example by taxing wealth more (and there are plenty of other approaches - our Wealth Gap Risk Register will go into them in detail next week). The second is to put in place safeguards to prevent wealth inequality from spilling over into other forms of inequality, such as political inequality.
Many European countries do this very well. The German sociologist Jens Beckert, comparing Germany with the US, describes how Germany (in common with many countries in continental Europe) has instituted a range of policies to reduce the impact and importance of wealth inequality, from a stronger social safety net to measures that limit the impact of wealth on political decision-making.
In the UK context, such measures to protect our democracy could include long-overdue reforms to our “fragmented, partial and weak” system of lobbying regulation, as well as steps to limit the donations that individuals or companies can make to political parties and to individual politicians (a topic that has hardly been out of the headlines in recent weeks).
Allowing wealth inequality to distort the democratic process is a big risk. Tackling it might be painful, but surely it’s better to get burnt fingers while the fire is still small than to let the blaze take hold.
Next week’s edition of Fair Comment might come out a day late, on Tuesday, to align with the launch date of the Wealth Gap Risk Register. Sign up for the launch webinar here.
Yes we do! I've been saying this for years; the US is far worse but we're heading in the same direction. None of the main Parties will tackle this issue because they benefit too much from those wealthy donations. We've allowed the pay differential to become too wide - business taxes could be used to encourage it back in the right direction, but the system is rigged against anyone being able to bring in radical reform.