Thomas Piketty on equality through taxation

Thomas Piketty’s Capital and Ideology is the most comprehensive study I know about the causes of economic inequality.  He gathered a vast amount of data and made sense of it.  To read my comments on his research, click on this, this, this and this.

In the last chapter, he outlined proposals for a “participatory socialism” to make society less unequal.  He saw three main ways to do this: (1) taxation, (2) reform of corporate governance and (3) educational reform.  This post will be about taxation.  I will take up the other two later.

His plan is based on steeply graduated income taxes, inheritance taxes and new taxes on wealth.  These were to be used to finance a wealth endowment of 60 percent of average wealth to every citizen at age 25 and a guaranteed income of 60 percent of average income.

He does not make absolute equality his goal, but he would allow a much narrower band of inequality than exists today.

I’ve long been indignant at the growing extremes of inequality in my country and the abuses of power of the very rich.  Reading Piketty forces me to think about just how much equality I want and how much I would give up to attain it.

Piketty wrote in earlier chapters of Capital and Ideology about how higher taxes have often been the key to greater national power and wealth.

One of history’s mysteries is how it was that European nations could defeat great Asian empires, such as the Ottoman Empire, the Mughal Empire in India or the Manchu (Qing) Dynasty in China, when, prior to the Industrial Revolution, they were equal in wealth and technology to the European nations.  It was the Chinese, for example, who invented gunpowder.

Piketty’s answer is that the Europeans gained an advantage through a higher level of taxation.  Tax revenue across Europe and Asia prior to the modern era was roughly 1 to 2 percent of national income.  This gave a king or emperor enough revenue to reign, but not to exercise tight control over his realm.

This changed in Europe, during the wars of the 16th and 17th centuries, when military competition forced kings to increase their revenues to 8 to 10 percent of national income.

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The greater revenue enabled kings to become absolute monarchs, exercising almost as much control over their citizens as a 20th century president or prime minister.  It also enabled them to put armies in the field that the Turks, Persians, Indians, Chinese and Japanese could not match.

Western governments’ revenue was bumped up again in the early 20th century, to 30 to 50 percent of national income.  This made possible the total wars of the early 20th century.  But it also gave governments enough money to pay for universal public education, old age pensions, public health and the other services of the welfare state.

This was only tolerable because the Western nations had grown rich enough that their people could give up a big fraction of their incomes to government and still enjoy a high material standard of living.

It would not have been possible in, say, France in the time of Louis XIV.  The taxes he levied to finance his wars reduced the peasantry to misery and, in some cases, starvation (because the nobles enjoyed most of the national income, but paid no taxes).

The same conditions may exist in poor African countries today.  But in rich Western countries, it is technologically and economically feasible to raise taxes revenues to 50 percent of national income, which is necessary for PIketty’s program.

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Steeply graduated income and inheritance taxes are nothing new in the history of rich countries.  The only difference is that he would consolidate all forms of taxes on wealth.

Americans who paid Social Security taxes, workers compensation taxes and unemployment compensation taxes would have their payments deducted from their income tax bills.

 PIketty’s idea of a wealth tax would be an innovation.  At present, the only form of a wealth tax in most Western countries is the residential and commercial property tax.  Piketty would tax net wealth and not just real estate.

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Someone who had a large home mortgage would be able to deduct the unpaid principal from the assessed value of the house.  On the other hand, people who had investment portfolios of stocks and bonds would have their value added their property taxes.

Piketty argued that an annual wealth tax might be more palatable to taxpayers than raising the same amount of money through an  inheritance tax.  There wouldn’t be any big one-time payment that would force an heir to sell a farm or business in order to pay the inheritance tax.

His plan calls for inheritance and property tax revenues equal to 5 percent of national income.  These revenues would be earmarked for a universal endowment—a payment equal to 60 percent of average wealth, to be paid to every adult upon reaching the age of 25.

Some people talk about believing in equality of opportunity, but not equality of result.  The problem with this is that one of the main reasons for striving for great wealth is to give your children a better starting point in life than others.

Piketty’s plan would not create complete equality of opportunity, but it would create a basic minimum.  Everyone would have capital that could be invested in a business, a home, higher education or whatever the individual chose.

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Income taxes would take 45 percent of national income.

Another 5 percent of national income would be taken out of income taxes to create a basic income of 60 percent of average income.  Citizens would receive whatever is needed to bring their incomes up to that level.

The remaining income tax revenue—40 percent of national income—would go to “the social and ecological state”—”health, education, pensions, unemployment, energy, etc.”

Piketty also would impose a graduated tax on carbon emissions on the level of individual consumers. The first five tons would be untaxed or lightly taxed, the next 10 tons somewhat more and on up to a maximum allowable level.

There are technical problems with PIketty’s proposal.  If tax rates, the universal endowment and the basic income are based on percentages of national income and wealth, they would fluctuate from year to year, depending on whether the nation was in a period of growth or recession.  Tax rates would go up during recessions, which would hamper economic recoveries.

Employers of low-paid employees would be the beneficiaries of the basic income guarantee.  They could lower or freeze wages, and the government would make up the difference between the lower amount and the 60 percent minimum guarantee.

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The larger problem is how Piketty fails to concern himself with any issue except economic inequality.  This is the main failing of Capital and Ideology overall.

His summary of the functions of “the social and ecological state” leaves out the two core functions of government.  These are law and order, and national defense.  Some other important functions are public services such as water and sewerage, maintenance of public works such as roads, bridges, dams, and response to emergencies such as fires, floods and hurricanes.

As an American, I think we could get by with spending less on the police and military than we do.  But, in the coming bad years, we are going to have to spend more on public services, public works, infrastructure repair and response to emergencies.

I am sure that, if I asked him, he would admit these things are important, but he only appears to think of them as they affect the distribution of wealth.

I think corporate monopoly is a big problem.  I think irresponsible speculation by bankers and financiers is a big problem, especially when they count on being bailed out by the federal government.  I think leveraged buyouts and private equity are a big problem.  I think stock buybacks are a big problem.  I think financial fraud is a big problem.  I think regulatory capture is a big problem.

I think there would be less economic inequality if it less easy to get rich by doing things that are useless, harmful and illegal..

Piketty’s best suggestion, in my opinion, is a wealth tax that covers all forms of wealth.  It wouldn’t have to be as high as recommended in the chart.

Simply tax all wealth at the same rate as I pay in property taxes on the assessed value of my home.  Add another 5 percent (that’s a arbitrary amount I plucked out of thin air) on wealth over and above a million dollars.  Make it 10 percent on wealth over and above a billion dollars.

This wouldn’t be confiscatory, but it would mean that the rich would not automatically get richer.  It would solve the problem that Piketty identified in Capital in the 21st Century, that the average rate of return on investment exceeds the average rate of economic growth/

LINKS (added later)

Bernie Sanders’ wealth tax proposal, explained by Tara Golshan for Vox.

Elizabeth Warren’s wealth tax explained by Matthew Yglesias for Vox.


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