THE BLOG
30/05/2014 13:06 BST | Updated 30/07/2014 06:59 BST

The Inequality Row: Has the Penny Dropped?

These are confusing times. Thomas Piketty, author of the best seller Capital In The Twenty First Century, predicts that inequality will continue to increase as returns on capital outpace economic growth. The Financial Times claims that Piketty's data is wrong and that there is insufficient evidence to support claims that inequality is greater than it was in 1980.

Who is correct?

Evidence of increasing inequality has been accumulating for 30 years. Taxes were reduced, the financial, property and IT sectors boomed and billionaires appeared. Since then, the number of billionaires based in Britain is reported to have increased tenfold to 104. The accuracy of some of the famous rich lists may be questionable but there is evidence from respectable sources showing that the share of national income taken by the top 1% in the US has doubled since 1980. In Britain, we know that in 1998, senior executives in FTSE 100 companies earned 47 times more than their average employee and that this disparity had increased to 140 times last year. The recent Office Of National Statistics report that the number of millionaire households has doubled in the last five years and that the top 10% own almost half the wealth in Britain, confirms a trend towards increasing inequality.

Picketty may be faulted on his data but I believe there is a more serious problem regarding his recommendations. He ignores the human factor, how people behave and what motivates them. Most people would agree that everyone should pay their fair share of tax and that the richer you are, the more you should pay. Picketty proposes a global wealth tax, which may sound good, but is impractical because it could not be collected without international agreement. Moreover, taxes on capital, although notoriously difficult to collect, risk deterring those who create wealth. Demotivating wealth creators is foolish; it would be far more sensible to create a culture and a tax system that motivates people to be successful, to contribute to society by insisting they pay national taxes wherever they live and also incentivises them to be philanthropic.

There is a glimmer of hope this week that the threat posed to civil society and to future generations by growing inequality and an unreformed financial sector is being recognized. Speaking at a conference on "Inclusive Capitalism", Mark Carney, governor of the Bank of England, warned of a breakdown in the social contract that should be at the heart of capitalism: "Prosperity requires not just investment in economic capital but in social capital". Christine Lagarde, head of The International Monetary Fund went further, noting that the world's richest 85 people could fit into one London bus and that their wealth is equivalent to that owned by the world's poorest half, all 3.5 billion of them. Warning that rising inequality is a barrier to growth and could undermine democracy and human rights, she said: "One of the leading economic stories of our time is rising income inequality and the dark shadow it casts across the global economy".

The key factor behind reform must be agreement on the purpose of money. Those philanthropists who encouraged me to write Giving Is Good For Youknow that money also has a moral and social purpose. They are concerned that so few of the wealthy understand why they should be philanthropic.

Next week, the life of an exceptional, generous yet modest man will be celebrated in Gosforth. Trevor Shears, who will be unknown to most outside the North East, was one of the first philanthropists I interviewed for my book. He and his wife became wealthy when they sold their share of a business. Believing they had far too much money, they established a foundation that gives away £800,000 a year to educational, cultural, environmental, health and community projects, many of which support the most vulnerable and disadvantaged and have little or no public funding. For Trevor and Lyn Shears, staying in Britain, paying tax and sharing their good fortune was the natural thing to do. His philanthropy will be Trevor's legacy. Britain would be transformed for the better if more followed his example. That relatively few do is an indictment of our society and a measure of the task facing those working out how to create a more inclusive capitalism.

John Nickson is the author of Giving Is Good For You: Why Britain Should be Bothered And Give More. He is giving his royalties to charity.