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Piketty’s 80 Percent Tax Rate Won’t Fix Unemployment or Wage Stagnation

3 min readBy: Andrew Lundeen

In his book, Thomas Piketty recommends an 80 percent marginal tax rate on income in the United States to address inequality.

Though an 80 percent 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. rate may very well succeed in taking more from those at the top, but the United States already has the world’s most progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. system (the top 25 percent of taxpayers pay 85.6 percent of federal income taxes). Additionally, it would have a highly distortive effect on the economy, especially in a country where 54 percent of all business income is earned through the individual tax code. An 80 percent would only make these matter worse and wouldn’t be wise policy—tax policy should be neutral and allow the economy to grow.

In a recent column, Kenneth Rogoff suggests one solution that would be far less economically distortive than the 80 percent top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. proposed by Piketty:

“Fortunately, there are much better ways to address rich-country inequality while still fostering long-term growth in demand for products from developing countries. For example, a shift to a relatively flat consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. (with a large deductible for progressivity) would be a far simpler and more effective way to tax past wealth accumulation, especially if citizens’ tax home can be linked to the locale where their income was earned.

“A progressive consumption tax is relatively efficient and does not distort savings decisions as much as today’s income taxes do. Why try to move to an improbable 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. when alternatives are available that are growth friendly, raise significant revenue, and can be made progressive through a very high exemption.”

Now, an 80 percent tax rate or a progressive consumption tax aren’t the only suggested ways to address inequality—other suggestions include fixing the high marginal tax rates created by the phase out in the EITC, eliminating the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. for lower income individuals, or implementing new wage subsidies.

Of the options, a progressive consumption tax to replace the income tax is likely the best options. It eliminates double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. and is neutral between consumption and saving. But even still, these policy suggestions misplace their focus on inequality instead of economic growth.

Instead of trying to rearrange the slices of a fixed pie, policymakers should focus on increasing the size of the pie—i.e. find ways to maximize economic growth. Good policy would make it easier to start and grow businesses, create jobs, and lift wages, and these aims should be the focus of policymakers.

From a tax perspective, this includes limiting our tax code’s biases against saving and investment, as we’ve seen done in other developed countries (such as Canada, which is now home to the world’s most affluent middle class).

A couple of options would be to lower the corporate tax rate, lower the top individual rate, move towards full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. , shift to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. , and integrate the corporate rate with (or lower) the dividends and capital gains taxes.

These changes present far better options for addressing inequality than an 80 percent tax rate, and they address it the right way: by giving opportunity to those at the bottom, instead of taking more from those at the top.