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Piketty or not Piketty?

May 11, 2014

Published in ‘New Europe’ Print and Digital Editions

PikettyAlright, I’m not going to analyze Piketty. I’m sure you’ve already read several reviews on his theory, and probably even some articles that contradict his policy recommendations—to impose a global tax on capital with punitive rates for the ultra rich. The debate is already so intense that it seems like the world is shaping into two distinctive groups, the pro and anti Piketty thinkers.

In fact, every ‘decent’ person these days, has heard about Piketty; for the few who haven’t, he is the author of a best selling book on capitalism that tops sales on Amazon and is viewed by many as the most interesting economics book of the decade; some even name him the ‘new Marx.’ What is really surprising is that a nearly 700-page book on economics has attracted such attention, and sold more copies that any fiction or travel book. This very fact alone says it all: that he is pointing at a real problem, inequality. Piketty analyzed income and wealth over the past 300 years in Europe and America. His main conclusion is that the (not so well explained) rate of return on investment outstrips the overall rate of growth of the economy. In other words, historically, the return on capital is bigger than the average GDP growth, which means that capitalism is threatened by capital ‘eating away’ an ever-increasing part of the wealth produced over the years by the economy.

Well, as expected, there are many objections to this theory. There are even ‘anti-piketty’ groups forming on social networks. But, as I promised at the beginning, I’m not going to dive into economic analysis, given that the interested reader can find more authoritative sources on the subject (Tyler Cowen’s article in Foreign Affairs, and Philip Mause’s analysis in Seeking Alpha are two good starting points.) What is more interesting here is to jump directly to the book’s conclusion: the introduction of a global tax on capital. Such a tax should be progressive, according to the author, and hit the very wealthy individuals hard, especially those who inherited large fortunes and didn’t produce anything themselves. Piketty wants those people to pay a tax of 5 to 10 percent annually, so that in a matter of a few decades their fortune evaporates…

Let’s first note that the idea is not new, nor is it Piketty’s invention. Back in 1977, Maurice Allais, the great French thinker and economist (whom I had the chance to have as a tutor on my post-graduate research thesis) had published a book (which was unfortunately never translated in English) named L’ impôt sur le Capital, where he extensively analyzed the concept. Of course, being a liberal, his aim was not so much to decrease inequality as to increase economic efficiency, posting that a reasonable taxation of capital would induce the owners of wealth to become more productive, and would act as a counter-incentive for being rentiers. Ironically, in an 1988 article in the French magazine L’ Expansion, weeks after Maurice Allais had received the Nobel Prize in economics, another of his ‘students,’ Dominique Strauss-Kahn, had written “[Allais’] work is so rich and diverse that some people will become famous by just using a footnote of one of his pages”…

From a different angle, in August 2012, the venerable German Institute for Economic Research (DIW Berlin) had also formulated proposals for a 10 percent capital tax on personal net wealth exceeding 250,000 euros per taxpayer. From their perspective, this should be a one-off levy and would target debt redemption rather than inequality. The proposal was subsequently adopted by several German politicians, and later appeared as a measure to be applied to all of Europe, in order to tackle the debt issue.

From a practical point of view, several countries already have a form of wealth tax, either in the form of a property tax, or a solidarity tax; or have applied it in the hardest form of a one-off levy on bank deposits, as in Cyprus at the moment of the bail-in. So, what is the new element that makes Piketty’s theory so attractive, and why did it gain worldwide interest this time?

To answer this question, one must refer to the issues behind the proposal for a global tax on capital—which problems is the tax supposed to address? Historically, there have been four considerations: a) to ‘moralize’ possession of wealth, b) to increase capital efficiency, c) to provide a solution to the international debt problem, and d) to reduce inequality. Of those four, the debt problem and inequality are the current drivers. It is reasonable, some will claim, that those who mostly profited from the extraordinary accumulation of wealth over the last 30 years, give back a percentage of their fortune in order to help resolve the over-indebtedness problem that emerged as a characteristic of that period. On the other hand, inequality is no longer an abstract idea, but a serious threat to the middle classes around the world, which cannot sustain a lifestyle they until now considered normal—here too, the appeal of a tax on capital is big.

In reality, such a tax is difficult to impose,at least in the current state of affairs. Economically speaking, it is far from sure that it will effectively address the inequality and debt issues. Nor is it really possible to predict the unintended consequences on society’s ability to create wealth in the first place, or on the eventual flows of capital that may arise. On the other hand, before each industrial revolution, we witnessed a huge accumulation of capital, just like now. Maybe, in order to resolve the current issues, it’s a better idea to push for the productivity gains from the coming one, rather than going for the old recipe of more tax.


From → Views & Opinions

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