Inequality has been, and will be, perennially offered as a justification for expanding government authority and budgets. No matter how many resources are devoted to combating inequality or redistributing wealth, the “problem” will never be solved and will always justify further intervention and new redistributive schemes. French economist Thomas Piketty and his frequent collaborators Emmanuel Saez and Gabriel Zucman have already created quite a stir with their research that purports to measure income and wealth inequality, and we can rest assured that their research will continually be cited to justify phalanxes of new government programs.
Perhaps even more troubling about the scholarship of Piketty et al., than its uncritical acceptance in some circles, is their closely related popular advocacy about what to do about it. They argue that inequality has grown in all advanced economies, that any inequality is inherently pernicious, and that the problem will continue to grow without limit unless checked by dramatic and unprecedented redistributive remedies. They claim to examine the growth of wealth and economic activity since roughly 1800, corresponding to the start of the Industrial Revolution. They focused on tax records to estimate the wealth of people with the highest income shares, concluding that the wealth held by the highest one percent and ten percent of the population has increased exponentially. Their conclusion was that this needed to be remedied with a wealth tax — rather than an income tax — that would extract unproductive “excess” wealth from those with the highest wealth shares, thus fixing what they perceived as the problem with how wealth has been distributed. Revenues from these taxes could then be used to lessen inequality or finance government programs that purport to improve society.
For example, Saez and Diamond argued in a 2011 paper that the optimal marginal tax rate for the US should be 73 percent, rather than our current 42.5 percent. Piketty and Zucman’s 2014 paper studied wealth-to-income ratios for advanced economies. The higher these ratios, the more wealth accumulation has occurred, and they found that in the U.S., the UK, France, and Germany these ratios have risen from between two and three in 1970, to between four and six by 2010 — levels not previously seen since before 1900. They attribute this wealth concentration to three factors:
1) asset appreciation, including appreciation of real estate values, which has increased wealth but not income
2) slowing productivity growth, which has prevented income from rising as rapidly
3) population growth, which contributed to lowering per capita income.
In Piketty’s view, the high, progressive income taxes France imposed after World War II were beneficial because they shifted wealth to the poorest, least-productive sectors of the French economy. This prevented the rich from amassing even-greater wealth, partially undoing the inequality that continued to rise elsewhere. Piketty concludes that tax cuts are inherently bad because they reduce the amount the wealthy contribute to society and enable them to restock their unproductive fortunes and estates.
According to Piketty, low taxes are bad, not just because they fail to provide enough funding for a plethora of public programs, but because they allow wealth to accumulate in unproductive savings owned by the wealthy. Piketty et al., seem not to consider the extent to which savings finance entrepreneurial experimentation and other productive ventures that advance society. Piketty decries what he calls the “patrimonial capitalism” typified by wealth accumulating in the hands of a few powerful families. His analysis of the Laffer curve for France led him to advocate higher tax rates and conclude that even higher taxes would not have too much detrimental impact in reducing the productivity of French executives and entrepreneurs.
Piketty has been especially critical of the Kuznets curve story that inequality rose at the onset of the Industrial Revolution but eventually fell as large masses of workers were enabled to migrate from low-earning subsistence agriculture into the more productive industrial sector made possible by free markets and scientific progress. This ultimate reduction in inequality was further amplified by the rising population that economic growth supported. Piketty’s proposed alternative explanation is that income inequality fell not due to technological progress and economic growth or their diffusion across the economy, but due to the imposition of high confiscatory income taxes, which in his view the more progressive the better. He suggested that starting in the 1980s, US income tax cuts had restored levels of inequality that had not been seen since the Great Depression.
In his 2013 Capital in the Twenty-first Century, Piketty argues that wealth inequality is an inevitable feature of any capitalist system that requires direct government intervention, whether in the form of taxation or some other form of wealth confiscation. Piketty advocates a uniform global wealth tax, since otherwise low-tax countries would become havens which would defeat the purpose of high taxes and make them ineffective. In his view, the need for this tax reform is especially urgent and it is the only way to preserve any semblance of either a free economy or democratic order.
Piketty is also an astute political analyst, criticizing the “Brahmin Left” as an elite dominated by highly educated voters who lack empathy or appeal for the working class. Perhaps more conventionally, he characterizes conservative establishments as the “Merchant Right.” His 2019 Capital and Ideology discusses self-sustaining “inequality regimes,” and purports to criticize capitalist apologetics — incidentally this would include anything AIER has ever published — attributing them to the institutional contexts that have entrenched particular elites. His argument is that people support and argue for institutional arrangements that have rewarded them at the expense of others. This explains resistance to his enlightened policy prescriptions like the uniformly global wealth tax, and further, it explains the wealth diverted to the policy-advocacy space to preserve the status quo and resist his brilliant ideas.
Whether the distribution is problematic and calls for correction is one question, but measuring the extent of inequality and whether it is getting worse is an entirely different issue. For example, the highest US income earners have captured increasing shares of total income since 1990, increasing income inequality by some measures close to what it had been in 1930. A serious shortcoming of Piketty’s research is that he assembles and concatenates income and tax data series from disparate and incompatible sources. Piketty’s data series are invariably stitched together like the Frankenstein monster in a way that supports Piketty’s thesis by amplifying the appearance of growing inequality.
Whether this inequality ever existed in reality remains highly questionable, since it may simply be an artifact of the transformations Piketty, Saez, and Zucman employed to extend series they constructed from multiple, incompatible sources. Furthermore, they almost invariably focus on income before taxes and government transfers. This ignores the redistributive effects of progressive income taxes, and redistributive government programs like unemployment and welfare benefits, not to mention social security, social insurance, and health insurance. Ignoring these imposes substantial bias that vastly exaggerates actual inequality. Coincidentally it also gives them a better story to tell with apparent evidence of growing inequality. Correctly accounting for them may well leave Piketty et al. without any story at all, or at best, a much weaker one.