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7 June 2016

Rather than income or savings, should we tax people on what they spend?

Those who have been lucky in life should pay more tax. As such, the proposals Robert H Frank makes in Success and Luck are less radical than they sound.  

By Tim Wigmore

“Luck is a component that a lot of people in the arts sometimes fail to recognise,” said Bryan Cranston, the star of Breaking Bad, four years ago. “You can have talent, perseverance, patience but, without luck, you will not have a successful career.”

Among leading figures, across all professions, this is not a popular view. Robert H Frank, an economics professor at Cornell University, found out as much when he wrote a column for the New York Times stressing the importance of luck. Soon after, Frank confronted an irate presenter on Fox News, who said that it was “insulting” and “outrageous” of him to stress the role of good fortune in success. He spoke for many.

Although short, Success and Luck is not so much one book as two. The first outlines why those who have risen to the top have been far luckier than they like to think; the second makes the case that, partly as a result, a more progressive taxation system should be introduced.

Those who are not predisposed to Frank’s arguments will find his first point more convincing. He shows that family wealth and connections, growing up in the right place at the right time and simple chance are all crucial to success. (Frank writes that his career at Cornell would not have happened without an invitation to a dinner party that he received, and he would not have written this book had he not cheated death twice.) Most important of all is to be born in a developed country.

Frank contends that luck is becoming more significant. On one level, this is counter-intuitive. As a result of advances in racial and sexual equality, chief executives who might have got their plum jobs partly because of discrimination against others are now not as lucky. However, globalisation has created what Frank terms “winner-takes-all” markets. Those who are 1 per cent better do not earn 1 per cent more, or even 10 per cent more. American CEOs were paid 42 times the wage of the average worker in 1980 but are now paid 400 times as much. The same process is at work in the entertainment industry: the top 1,000th of 1 per cent of song titles accounted for 7 per cent of total sales in 2007, but
15 per cent by 2011.

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While those who are most successful are almost always talented and hard-­working, there are innumerable others every bit as talented and hard-working who do not make it. Frank posits that success is 98 per cent hard work and talent and 2 per cent luck – but as so many have the 98 per cent, those who succeed would not have done so without the 2 per cent. Bill Gates, for example, attended one of the few junior high schools that offered unlimited access to computers in the 1960s, while Steffi Graf won more Grand Slam tennis trophies and earned more money because of the bad luck of her great rival Monica Seles, who took two years out of the sport after being stabbed on court by a deranged fan.

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Where Frank differs from Malcolm Gladwell, who wrote about luck in his book Outliers, is in the more overtly political tone of his analysis. “Few questions more reliably divide conservatives from liberals” than the significance of luck, he writes. In essence, Frank’s view is that the most successful of us have been luckier than we realise, so should pay more in tax. He documents how American infrastructure has collapsed – a 2013 report concluded that the US will have clocked up a $3.6trn infrastructure backlog by 2020, which could have been largely covered had it not been for the tax cuts for the rich that were passed by George W Bush in 2001 (these denied the state an estimated $2.9trn in revenue over the following ten years). As a result, would-be entrepreneurs had fewer of the benefits enjoyed by their predecessors.

Along the way, Frank also appeals to self-­interest. He asks whether someone would be happier driving a $333,000 Ferrari on roads that are full of potholes or a $150,000 Porsche on immaculate roads – a microcosm of how the rich could benefit from being taxed a little more heavily. Besides, it is not as if a few extra thousand would make a material difference to the happiness of society’s richest. Indeed, Americans whose wedding cost more than $20,000 are 12 per cent more likely to get divorced than those whose wedding cost between $5,000 and $10,000. Frank shows that the rich can be happy with less: in Manhattan, multibillionaires buy properties far smaller than elsewhere, because that is the cultural norm.

Frank’s vision is of a progressive consumption tax: people would not be taxed on their income or savings but on what they spend. The concept is less radical than it might appear. In 1943, the libertarian economist Milton Friedman suggested such a measure as a prudent means of raising additional funds during the Second World War.

However, Frank’s central argument does not fully convince, partly because it comes with so many caveats. The present economic climate is not a good time for the idea, he writes, inviting the question of why the book has been published. He advocates a progressive consumption tax being implemented when “full employment has again been restored”. He might be waiting a while: beyond Scandinavia, nothing like full employment has been seen in the West since the end of the 1945-73 “golden age”.

There are two wider concerns with Frank’s proposal. First, how could it work in a globalised world? A banker in London or New York could spend virtually all their wealth overseas and contribute far less in overall tax than they do today. Second, if properly implemented, the system would encourage the rich to save more and spend less. This sounds harmless enough but, when people spend less, there is less money flowing in the economy, causing economic stagnation. However unpalatable the idea may be, elites fitting their mansions with multiple jacuzzis is far better for tackling unemployment than their cash being siphoned away into savings accounts. Why Frank prefers a progressive consumption tax to a wealth tax is never made clear. 

Success and Luck is an important book: elegantly written, well argued and desisting from self-indulgence in its length. It is a reminder that talent and hard work might be necessary to succeed but they are far from sufficient. As Napoleon said, “Ability is of little account without opportunity.” Yet, in keeping with the political left’s recent travails, those who do not sympathise will find themselves agreeing more with Frank’s diagnosis of the problem than his solutions.

Success and Luck by Robert H Frank is published by Princeton University Press (208pp, £18.95)

This article appears in the 01 Jun 2016 issue of the New Statesman, How men got left behind