The ongoing turbulence on Wall Street—with unknown stocks soaring, trading being frozen and elites being shaken—is not just an ideological attack on the gatekeepers of finance.
As a former investment banker turned charity executive, I see it as an inevitable result of the systemic inequality and deeply entrenched poverty that we have, for too long, tolerated in some of the world's richest nations—inequality and poverty that can only be remedied with a wealth tax.
The GameStop raid, and other similar actions that will surely follow, is an attempt to redistribute trapped wealth through the economy, from the hands of hedge funds to the pockets of the average citizen.
These actions have the effect of a wealth tax, but implemented from the bottom up with potentially damaging side effects. Governments should think carefully about engineering the same result in a far more sustainable way from the top down, to reduce inequality and stimulate economic growth post-COVID.
GameStop leader "Roaring Kitty," whose real name is Keith Gill, is a 34-year-old long-distance runner from Massachusetts. He screenshotted his $20 million gains and shared them with the media. The question now becomes at whose expense has Gill become wealthy?
Many amateur, small stockholders will be keen to follow in his footsteps. Most are likely to fail. There needs to be a more orderly way of circulating trapped wealth out of the hands of elites, and creating opportunity for poorer socioeconomic groups.
This is exactly what many hoped would happen after 2008, when bankers shorted their own stock upon realizing that the housing bubble was about to burst, without telling their customers. While they profited off their own recklessness, average Americans lost their pensions, mortgages and life savings. Our financial services sector has long forgotten 2008, the average American or Brit hasn't.
Boston Consulting Group predicts that around 70 percent of U.S. wealth will be in the hands of millionaires and billionaires by 2021, while it faces the sharpest rise in poverty in almost 50 years.
Incremental change—a penny on income tax here, a nudge to value-added tax (VAT) there—won't create the kind of change many want and need.
There will almost certainly be tax rises to pay for the COVID support packages rolled out by the U.K.'s Rishi Sunak, but rather than simply increasing taxes, perhaps we need to think about the types of taxes we have.
We need a system that encourages capital to flow around the economy without stagnating in the hands of the 1 percent. In other words, we need a wealth tax.
A wealth tax would tax people on the assets they own, and not their income (like income tax) or their spending (like VAT). While the idea may appear bold to the modern eye, it is nothing new.
The ancient Greeks implemented a wealth tax in 600 B.C. One of the core practices of Islam is zakat, a 2.5 percent wealth tax on privately held disposable assets. During the reign of Caliph Umar II in the 700s A.D, the zakat collection and re-distribution process was so successful that, after some time, many regions struggled to find eligible recipients, leading to a surplus of zakat funds. Yes, we live in entirely different circumstances to eighth century Arabia, but some principles are timeless. When implemented successfully, a wealth tax works.
It works because it turns capital from being a hoardable asset into a hot potato; it becomes tax-savvy to spend or invest it—creating opportunities for others to lift themselves out of poverty.
Too many arguments about increased tax sound like they are simply about punishing the rich. A wealth tax serves both the rich and the poor: by incentivizing the wealthy to purchase goods, services and make investments, instead of hoarding cash in bank accounts. This way, capital would flow in all directions, boosting local economies and supporting embryonic business ventures.
If for example, an investor had $2 million in cash and left it in the bank, a 2 percent wealth tax would mean the government is owed $40,000. But if that same investor wants to avoid the tax, she may well make investments as a means to avoid the tax. The full $2 million would end up energizing the economy instead, and creating much needed post-furlough jobs.
This is exactly the kind of risk-taking and growth that all of us, across political divides, know we need more of if we are to recover economically this year and beyond.
The alternative is to have a low-growth economy with high levels of unemployment—and more and more GameStops.
Iqbal Nasim MBE is CEO of the National Zakat Foundation. He has contributed to the BBC News Channel, Al Jazeera English and the i paper.
The views expressed in this article are the writer's own.
