Piketty’s Wealth Tax

June 16, 2014

This will be one of a series of articles focused on the findings of Capitalism in the Twenty-First Century by Thomas Piketty. By all means, if you can read the book, or listen to it on Audible, do so. It’s worth the investment. But since many will not be able to dedicate the time to it, I offer these observations, along with my own views, of course.

I’m starting in reverse, because many people may elect not to read the book because the policy recommendation is unrealistic. Please do read the book!

The Wealth Tax

Starting from the “policy prescriptions” part of the book, which is the final section of such scholarly works, let’s understand his proposal and why he proposes it.  Let’s begin with Piketty’s acknowledgment: “A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon. To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues….Admittedly, a global tax on capital would require a very high and no doubt unrealistic level of international cooperation.”

His acknowledgment should dispense with the critics who have been proclaiming this prescription is impossible.  He says so himself. So, why has he bothered to develop an extensive argument for such a tax, if its unrealistic?  He explains: “…this ideal…can serve as a worthwhile reference point, a standard against which alternative proposals can be measured….[and] when looked at closely,…this solution turns out to be less dangerous than the alternatives.” That is the opinion which he supports with some of the following arguments, highly abbreviated, my interpretation:

  • First, it is helpful to stipulate just for this reading, that there is indeed a major problem in the trend of inequality in the world. If you can take that for granted for the moment, it will help. His first 514 pages offer the history, various explanations, and his prediction that it is highly likely the current trend will continue, if not addressed with policy. In other posts, I’ll try to summarize some of the preparation leading to the prescription.
  • It will also help to stipulate for now that the decline in inequality between 1945 and 1970 was not due to “natural” elements, but rather due to specific policy (e.g., tax) changes instituted in many nations in the aftermath of huge macro-economic events of the first half of the twentieth century–specifically the two World Wars and the Great Depression. Without these policy changes, inequality would not have declined, and the reversal of these policies (opposite policies) are driving the dramatic increase in inequality beginning about the time of Reagan in the US (1980). Without new policy changes, he argues, inequality is likely to continue to rise–perhaps to levels experienced in Europe in the 18th and 19th centuries.
  • The primary policy he recommends is the wealth tax. This tax would require disclosure of all assets we each own–stocks, cash, property, businesses, art and jewelry (within practical limits, I will add). This could be a one time tax or an annual tax (more likely), and most likely would be highly progressive. There would need to be international agreements on where/how the revenues are split up and spent. He doesn’t propose the wealth tax as a substitute for other taxes. Each major form of taxation has it’s own specific purpose in his view. The reason a wealth tax is important (vs income tax) is that inequality due to wealth differences is far greater than inequality due to income differences. The taxing would in itself reduce inequality, and the use of proceeds could drive further future reduction in inequality.  Amounts taken would not be sufficient to reduce incentives for hard work and talent, at least not significantly.
  • As to the size of the wealth tax, Piketty does not give specific recommendations, just hypothetical examples: One example is a tax of nothing on wealth below $1 million euros (about $1,350,000), 1 percent between 1 and 5 million, and 2 percent above 5 million, would result in an annual contribution of about 2 percent of Europe’s GDP, which is a very significant number, if it were to be applied to critical elements of equalization for the underprivileged–like schools, job training, better health care, etc.  2 percent for the US would be about $300 Billion, a very substantial number.
  • If one is not persuaded that high and rising inequality is a risk to the social stability and sustainability of  the capitalistic system (which he proposes to slightly constrain in one of its most egregious excesses by his proposal), one might be concerned about the level of national debt in the US and in many other countries. One might resonate with Piketty’s explanation of how a wealth tax could be the most effective way to eliminate or significantly reduce record government debt levels. For example, simplistically, Piketty calculates that the public debt of most countries, averaging about one full year of national income in size, could be eliminated entirely by a flat one time 15 percent tax on all private wealth. Can you imagine a world without government debt, without that burden and risk on future generations, without the necessity to dedicate a significant percentage of taxes to interest and debt repayment? Of course, Piketty does not propose this–a more progressive schedule could be developed and 5 to 10 years could be used to accomplish it–or longer.
  • Or, if eliminating debt does not attract one, what about the cost of repairing and preventing the damage from climate change, a cost which some estimate to be equal to 5 percent of global GDP per year, according to Piketty?
  • Furthermore, the tax is not so new as some first think. There are wealth taxes currently in existence. Most prominent is property tax, but there are other forms in various nations.
  • The information to effectively enable the collection of such a tax would come from government records (as with property taxes), and from banks and other financial institutions where traded assets are held. Taxes could be on gross value or net of debt. Some critics have focused on the question of valuation of certain types of capital–e.g., privately held companies, such as Koch Industries. Indeed, this is an example of a executional challenge, but not impossible. The world figured out how to value real property for taxation, at least well enough, and there were many who thought this an unsurmountable challenge at the time.
  • Also, the informative value of a wealth tax, with all global financial institutions reporting, is high.  Some will argue this risks personal privacy, but our property ownership is already recorded by local governments and our financial assets are already recorded by the financial institutions which hold them. If there was a secure and accurate international governmental record of all assets owned by each of us, we would have a far better understanding of inequality in the world–and incidentally, also perhaps then able to document the fortunes of criminals and drug dealers, etc., whose assets are at least in part held by financial institutions which would be obligated to report in such a scheme.  Escaping taxes by placing assets in tax havens would be impossible.
  • Piketty points out that while this proposal seems impossible, it may not be. After all, income taxes seemed impossible in the world until around 1910 and the following decade, when a number of developed nations struggled through the debate and complications and enacted such taxes. In fact, France imposed a 25 percent one time tax on capital (wealth) in 1945, to deal with war costs. It has been done elsewhere.

These are a few of the important observations of the final chapters of the book. Piketty’s book examines alternatives to the wealth tax–inflation, central bank actions, and other policies which could be used to address the issues he is concerned with–but he finds none remotely as effective as the wealth tax.

I’m in favor. I would be willing to pay 15 percent of my modest wealth to fully eliminate public debt, and I would be willing to pay annual percentages of a progressive wealth tax to reduce inequality and allow investment in opportunity building for the underprivileged.

I welcome your comments

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