by Madeleine Kando
Piketty has caused an international panic. The camps are predictable: he has been criticized vehemently by the Right, including the London Financial Times and the Wall Street Journal, and he is being defended by progressives, for example by Paul Krugman. Clearly, Piketty is a threat to the plutocracy. But as you will see, I agree with Krugman that Piketty is fundamentally correct.
Thomas Piketty is the author of the voluminous 'Capital in the 21st Century', a book on economics and the growing inequality between the rich and the poor. This unassuming professor, who looks more like a schoolboy than a formidable economist, has taken the world by storm. His book contains an incredible collection of historical data that shows that the extreme concentration of wealth that was so typical of the 19th century, the Belle Epoque (1871-1914) is coming back in full force to haunt us in the 21st century.
Piketty's goal is to make economics understandable to the average person and I think he has succeeded. He also gives a clear political message; it is everyone's business to think about 'the economy'. There is no line between economics and the influence it has on the politics of a country. They are one and the same.
Throughout the book he refers to literature. Balzac, Dickens, Bronte. What defines the characters in these authors' stories are their social and economic standing. A Tale of Two Cities, David Copperfield, Hector Malot's 'Sans Famille', all masterpieces of social commentary. The terrible conditions of the poor in 'A Tale of Two Cities' are not a result of Dickens' imagination, they describe the incredible inequality between the rich and the poor during that period.
Wealth concentration and inequality are again reaching unprecedented heights, bringing back the nightmarish images that we all thought were a thing of the past. We are back in a world where the bottom half of the world population only has 2% of the share of the world’s wealth. 2%! Children are still starving, maybe not in the poor houses of Charles Dickens' time, but they do live in cars, in shelters, they die of hunger and malnutrition. Entire continents are malnourished as in the 'failed states' that abound in Africa. According to a recent report by Oxfam, the richest eighty-five people in the world—the likes of Bill Gates, Warren Buffett, and Carlos Slim—own more wealth than the 3.5 billion people who make up the poorest half of the world’s population.
Contrary to what most people believe, Capitalism does not have a built-in safeguard against the growth of unsustainable inequality, and this will ultimately undermine Democracy. It is Capitalism's inevitable tendency to steadily concentrate wealth, and only rapid growth (in technology, a rising population or government intervention), can keep capitalist economies in check.
Piketty describes this with a simple formula. He expresses this as 'r > g'. When 'r' (the rate of return on capital) is greater than 'g' (the rate of economic growth), wealth begins to accumulate in the hands of capital owners and it is removed from the hands of the people who are dependent on growth for their income. Not only does this cause unacceptable levels of economic inequality, but it undermines democracy, because influence can be bought and it creates political inequality as well.
Now we have the added problem of what Piketty calls the ‘supermanagers’, executives that get paid exorbitant salaries. This makes America stand at the top of the list. It is hard to believe that in a country that prides itself on being the land of opportunity, there has been such an about face over the past 30 years. It is now what 'Old Europe' used to be, an elitist, unequal and unfair society. This is why Piketty suggests raising the marginal tax to a pre-Reagan rate, say 80%, so that these self-determined salaries would automatically be kept in check.
Capital had accumulated in the hands of the few at the top, but the world wars cut that ratio in half. After World War II, the ratio of capital to income remained low due to spectacular economic growth and a very high marginal tax rate.
During the “Trente Glorieuses,” or “Glorious Thirty” years, the years that I grew up in, there was a large affluent middle class. Big cars, big refrigerators, stay home moms, the era depicted in the TV series Madmen. But since the 1970s, capital and wealth have been trending steadily back. And this accumulation of capital, says Piketty, will eventually recreate Belle Époque–style inequality unless something is done to stop it.
There will come a time when the majority of people will rebel against a system that does not work for them. If Capitalism doesn't work for the majority, what's the point of it? A revolution style solution? Piketty suggests something more civilized and probably more effective: a progressive wealth tax.
People whose fortunes are smaller than a million would not pay the annual wealth tax. A fortune between 1 and 5 million would require an annual 1% wealth tax, fortunes larger than 5 million would be taxed 2% and so on. This would force financial transparency, create a record of where all the money is kept and help improve 'the social state' by creating revenue. How can we plan for the future, improve our planet and ultimately safeguard our survival, when we have no idea of what we can work with?
Although this utopian idea would not be a terrible financial burden on the super-wealthy, it is unlikely that it will happen any time soon, especially now that extreme wealth and political power have morphed into each other, Piketty at least has opened the door for us to think about ways of preventing the inequality train from derailing our society.
The most useful aspect of Piketty’s book is its historical context, which allows us to compare. Wait a few decades and we will see our current inequality rise and match or even surpass 19th Century inequality. It is idiotic that our tax system allows the wealthiest members of our society to pay the least in taxes. Liliane Bettencourt, founder and owner of L’Oreal cosmetics, and presumably the richest woman in the world, is worth $30 billion. Fortunes that size yield at least 10% return, so that means that she cashes in $3 billion a year. She declares an income of $5 million, which is one thousandth of her net worth. I am too flabbergasted to figure out which tax bracket she falls under.
Piketty is convinced that public policy can make a huge difference in preventing Capitalism from hijacking Democracy. His solution can only work if it is implemented globally, otherwise our friends in the 1% will just find another country to hoard their wealth. One country doing the right thing will result in Capital flowing somewhere else. This can only work if everyone is on board by implementing a global wealth tax and if every country agrees to financial transparency. leave comment here
8 comments:
Piketty has taken the world by a storm because he has begun a discussion of economic inequality based on an analysis of the rate of increase of the wealth of the wealthy vs. the rate of increase of the average person. In the first part of the book he has developed some very convincing formulas for wealth accumulation under current Western laws.
It is not a comprehensive discussion of economics but, like Marx, has focused on an aspect of economic injustice and convincingly explains reasons why this disparity exists in the present system.
He makes a few mistakes. He misdefines "capitalism" and is really concerned about the disproportion of earned income vs. the passive income of investors. In this way, investors live off the sweat of the laborer, and evermore concentrate capital.
It would be a grave mistake to accept his solution which is a global tax, because it would concentrate capital even more, just in the hands of other people with more absolute political power. This was the mistake of communism in Russia.
It would be better to change the ratios of existing taxes in different countries: e.g. tax passive income on stocks and dividends at a higher rate than wage labor, forcing a greater economic democracy in which capital concentrates less among passive investor and increases for workers.
He also fails to distinguish between wealthy passive investments and corporations, but that is another discussion.
Madeline, Taxing passive income is a form of tax on exploitation of others. I would need to get into the difference between taxing corporations (which should be 0%) and taxing individuals when the earn great sums of wealth on investments. He is also for taxing inheritance of large amounts, which is also probably a good idea (e.g. the case of the heir of L'Oreal).
It's probably not easy to come to mutual understanding when we have such different backgrounds. For example, I would define capital as the resources necessary for production of goods, it has nothing to do with supermanagers, which is a problem you could see in Robert Reich's book on "Supercapitalism."
Gordon: I am not sure why you assume that a global wealth tax would concentrate capital even more. Piketty is not a Marxist by any means. A modest progressive wealth tax would go a long way towards generating sorely needed revenue and above all give us the necessary data to be in control of our nation's wealth.
What you suggest, taxing differently in different countries would aggrevate the situation by capital flowing to tax havens. A wealth tax would only work globally.
His definition of Capitalism is pretty straightforward. He is all for it and comparing his proposal to Communism is a mistake.
Gordon: Don't we already have taxes on resources in the form of the VAT?
Not only does he propose taxing inheritance, but taxing inheritance annually. I think that is a big difference. Super-salaries which eventually turn into inheritance, in my opinion should be taxed annually. It adds to an extreme concentration of capital, which is not healthy.
Madeline, A global tax on wealth would concentrate wealth in the hands of a central taxing authority. On one level, it doesn't matter whether money is concentrated in the hands of individuals, governments,or corporations, it still gets concentrated and creates a 1% class of individuals. I can understand why the idea of taxing in a central location is so powerful because it is a form of redistribution by force, but this inevitably leads to structural violence and political instability.
It is more important to leave any concentrated capital in a productive mode (e.g., within a corporation) a zero percent corporation tax would solve that problem and tax "wealth" instead of "capital". So let states tax pay progressively when people take wealth as profit out of the corporation. Tax, or forbid, mergers and acquisitions, which is a form of "wealth taking" by corporations. Promote wider competition by eliminating patents and government protection of quasi-monopolsitic enterprises that accumulate wealth. In a situation of pure competition there are not many excess profits generated.
The real goal should be the wide distribution of wealth, analogous to the wide distribution of political power by universal franchise, e.g., economic democracy. This can be systemically encouraged by an economic system that doesn't encourage concentrations of wealth like present systems do.
This will not happen if you have a global taxing authority anymore than putting all your cells in the brain and having the brain redistribute them throughout the body. Picketty's observations of "what is" are great and exciting, but his solution is a sledgehammer rather than genuine system reform. It sounds appealing but it works no better than communism-which was also a sledgehammer approach. There is violence inherent in such approaches.
My sister and I argue about this all the time. She is an accountant and sees the numbers first hand.
I say that money is only paper and that having all that paper is only influential if we let it be.
Also, I see what people do who have large amounts of money and what those with less do with their money.
I see people get large inheritances and then die from all that money and stress it brings. I believe there are checks and balances in our society whereby when there are too many poor people compared to rich, something happens. So while rich people are accumulating all their paper and power, they still can only eat so many fine meals,live in so many houses, extend their beauty and influence so far.
Many rich people have build tremendous public goods or given their possessions for public good.
There will always be starving people as long as their is food and procreation. When the food is gone, they will be gone and no longer starving.
My point is that having children when there is not enough food is pointless and having too much that you cannot protect and administrate is equally dangerous to your health. What is the best use of the human resources and natural materials for the best outcome for the future of our world?
Gordon: Piketty does not specify how to implement a global wealth tax. Whether it would be by country or through a central authority. It also would not create more bureaucracy since there is already established sources that such a plan could rely on.
The difference between wealth in the hands of private individuals (shareholders, corporations) and government is that it would be redistributed by the latter (as you call it by force, I would rather call it ‘by common consent’) and not necessarily by the former. There was a 90% marginal income tax in this country not too long ago, which did not lead to violence or instability, just a higher standard of living and a larger middle class.
There was a time when income tax was being ridiculed and thought of as irrational. I don’t see any reason why a modest wealth tax would hurt economic progress or growth. I would definitely not call his idea a sledgehammer approach.
What I miss in your argument is the redistribution of wealth to enhance what Piketty calls the ‘social state’, i.e. public services, schools, hospitals, etc. What is the purpose of wealth if it just benefits ‘the economy’ and not the average person?
Anonymous: your coment makes sense, except that Piketty is more concerned about the ‘extremes’ of inequality, not inequality itself.
When too much inequality goes unchecked, it is bad for everyone. Wealth distribution could never be equal (i.e. 50% for the bottom half of the world population, 50% for the top half, in which case we wouldn't be talking about halves).
Piketty rightly points out that 2% for the bottom half and 98% for the top half is unacceptable. We are supposed to have evolved from a feudal society, but obviously we haven’t (yet).
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