French economist Thomas Piketty has a new book out on inequality, in which he claims that capitalism tends naturally towards greater and greater concentrations of wealth. To address this, Piketty recommends progressive income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates of up to 80 percent and a global wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. of 2 percent. Here are some summary charts and here is a review of the book in the Washington Post by Steven Pearlstein:
Just when you thought Karl Marx had finally lost all political and economic relevance, a brilliant French economist has come along to pick up where the German philosopher left off — correcting for many of Marx’s mistakes, updating his analysis in light of subsequent experience and unearthing a bounty of modern economic data to support a theory about capitalism’s inherent and self-destructive contradictions.
The economist is Thomas Piketty, a professor at the Paris School of Economics, who with Emmanuel Saez of the University of California at Berkeley has recently turbocharged the debate about income inequality. Piketty and Saez gathered data from tax returns that confirm the story of stagnant middle-class incomes over the past 30 years while revealing how much the super-rich have pulled away from everyone else.
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Piketty’s prediction of a 21st century of slow growth and extreme inequality is based on historic data and a simple equation. The data, which he assembled with various collaborators in several countries, show that over long periods of time, output per person — productivity — tends to grow at an average of 1 to 1.5 percent. The data also show that average return on investment over long periods of time ranges between 4 and 5 percent.
The problem with these two historic trends, Piketty explains, is that whenever the return on financial capital (investment) is higher than the return on human capital (productivity) for an extended period, it is a matter of simple arithmetic that growing inequality will result. The reason: Those with the highest incomes will save and invest, generating capital income that will allow them to pull away from those relying solely on wages and salaries. It takes only a few generations before this accumulating and accumulated wealth becomes a dominant factor in the economy and the social and political structure.
The big problem with Piketty’s big idea is that the people who earn high-incomes tend to change every year. The chart below shows IRS data on people reporting at least a million dollars of income over a nine year period. It indicates that half of these millionaires were millionaires just once. Only 5.6 percent reported at least a million dollars of income in all nine years.
Penalizing this 5.6 percent with high tax rates also penalizes the 94.4 percent who are only temporarily rich. Further, basic economics tells us that punishing the rich also punishes the poor and the middle-class, because it hurts business formation, growth, investment, innovation, productivity, hiring and wages. I believe this is what previous followers of Marx have found.
See our chart book for more on inequality and the consequences of taxing the rich. Here is our study on income mobility and the persistence of millionaires.
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