Originally published on Forbes.com May 13th, 2014
Capital In The Twenty-First Century – The Cliff Notes
Unless you have been hiding out somewhere, you have probably heard about Thomas Piketty’s Capital In The Twenty-First Century. If you don’t want to take the time to read the whole thing (It is on the longish side), you can get the gist of it in one of the appendices titled “The Central Contradiction of Capitalism: r > g“.
The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. The inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted capital reproduces itself faster than output increases. The past devours the future.
The History Lesson With Some Literature Thrown In
Much of the book is dedicated to explaining why the overwhelming force of inherited wealth contradicts much of the experience of the twentieth century. Piketty points to typical novels in the 19th Century, particularly those of Jane Austen and Balzac, to show how overwhelming the influence of inheritance was on even the moderately prosperous.
It brought to my mind a discussion we had when I was a junior in high school. We had read The Moonstone by Wilkie Collins and the thing that struck us more than anything was that none of the characters seemed to have jobs. Mr. Canavan laughed and explained English gentry life to us. As Piketty explains it, all that capital that had been accumulating for centuries was hit with a series of shocks beginning in 1914, so that in our lifetimes, most wealth was the result of recent accumulation.
…..the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war.
Ultimately, the decline in the capital/income ratio between 1913 and 1950 is the history of Europe’s suicide, and in particular of the euthanasia of European capitalists.
….the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945.
In the 19th Century extreme inequality was entirely unremarkable – even more in the United States than in Europe thanks to the New World’s Peculiar Institution:
What one finds is that the total market value of slaves represented nearly a year and a half of US national income in the late eighteenth century and the first half of the nineteenth century, which is roughly equal to the total value of farmland.
All told, southern slave owners in the New World controlled more wealth than the landlords of old Europe. Their farmland was not worth very much, but since they had the bright idea of owning not just the land but also the labor force needed to work that land, their total capital was even greater.
In the South we find a world where inequalities of ownership took the most extreme and violent form possible, since one half of the population owned the other half.
Policy Recommendations
Of course, what is of most interest to a tax blogger are Pikitty’s policy recommendations. Although it is almost incidental, since he is more concerned about wealth inequality, Piketty recommends a very high 80%+ tax on high incomes – kicking in at somewhere between $500,000 and a million. He believes that the “super manager” salaries that have become prevalent in the Anglo-Saxon countries are a result of our moving away from high marginal rates.
what primarily characterizes the United States at the moment is a record level of inequality of income from labor (probably higher than in any other society at any time in the past,
Piketty is more interested in reducing the mega-salaries than the revenue that would be raised from the higher the rates. He is dismissive of concerns about such a measure harming productivity.
Indeed, they indicate that levying confiscatory rates on top incomes is not only possible but also the only way to stem the observed increase in very high salaries. According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.
The evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.The idea that all US executives would immediately flee to Canada and Mexico and no one with the competence or motivation to run the economy would remain is not only contradicted by historical experience and by all the firm-level data at our disposal; it is also devoid of common sense.
Piketty’s main policy recommendation is a global wealth tax (if not global than at least over a large region). Even a fairly modest global wealth tax would create statistical transparency. When you look at the wealth of a nation, you can consider the resources of that nation. Some of those resources will be owned by foreigners. Of course the residents of the nation will also own foreign assets. As anybody who has done a consolidated financial statement should know, that should all balance out if you looked at the whole world. Only it doesn’t.
As I have shown, the planet’s financial accounts are not in balance. (Earth seems to be perpetually indebted to Mars.)
An 0.1 percent tax on capital would be more in the nature of a compulsory reporting law than a true tax. Everyone would be required to report ownership of capital assets to the world’s financial authorities in order to be recognized as the legal owner, with all the advantages and disadvantages thereof.
The main reason for the capital tax is to prevent Piketty’s vision of exploding inequality.
……..no matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility.
The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises.
Is This Guy Serious?
My career has spanned the period in which the United States moved from high marginal rates – 70% when I started – to much lower rates and something of a war on tax shelters. The high marginal rates seemed to create an irresistible impulse to use the tax code as the Swiss Army knife of social policy. Something tells me that high marginal rates will not all of a sudden give us CEOs who will say “Screw it, I’ll just take 400 grand. Not much point in having more.” Rather, there will be a renaissance of shelter activity.
The wealth tax presents really serious implementation problems, which I discussed with the presidential candidate of the one party that has a wealth tax on its platform
Piketty’s proposals are unlikely to get serious traction in either of the major parties in the foreseeable future. Still, the popularity of this work in some circles might be viewed as a warning shot across the bow of the privatization ship that might have gone a bit too far.
If you have free trade and free circulation of capital and people but destroy the social state and all forms of progressive taxation, the temptations of defensive nationalism and identity politics will very likely grow stronger than ever in both Europe and the United States.
This is the main justification for a progressive annual tax on the largest fortunes worldwide. Such a tax is the only way of democratically controlling this potentially explosive process while preserving entrepreneurial dynamism and international economic openness.
And In The Long Run
John Maynard Keynes famously said that in the long run, we are all dead, but he also wrote something that those inclined to write Piketty’s proposals off as moonshine might want to consider.
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.
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