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Piketty on Inequality

May 21, 2014 in Economics

By Randall Holcombe


The ultimate thesis in Thomas Piketty’s best-selling Capitalism in the Twenty-First Century is that the return on capital is higher than the growth in output and wages, so the owners of capital will see their wealth, and therefore, incomes, rise faster than those who earn the bulk of their incomes through labor. The distribution of wealth and income will become increasingly skewed to the benefit of the owners of capital.

Piketty recommends progressive taxes on income and capital as the remedy to the growing inequality he forecasts. He says (p. 471), “…the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a global tax on capital.” The tax (p. 516) “…ought to be a progressive annual tax on individual wealth.”

Piketty makes clear that the purpose of the progressive taxes he recommends is not to provide funds to raise the incomes of those at the bottom, but rather to lower inequality by reducing the incomes of those at the top.

Recommending a progressive income tax with rates of 50-60% on incomes over $200,000 and a top marginal rate of 80% on incomes above $500,000-$1 million, he says (p. 513), “A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level…” Recommending a progressive tax on capital, Piketty (p. 518) says, “The primary purpose of the capital tax is not to finance the social state but to regulate capitalism.”

Piketty freely admits that the policies he recommends to reduce inequality would not do so by bringing up those at the bottom end but rather by bringing down those at the top.

When one looks at the remarkable accomplishments of capitalism, an economic system that is roughly 250 years old, among its top accomplishments is how much it has done to improve the standards of living of average citizens and the working class. The rich have always been very comfortable, and capitalism has brought a level of comfort to working-class people today that would have been unimaginable to even the most well-off people a century and a half ago.

Why should average citizens be concerned about the wealth of the very well-off if the system that makes them well-off produces prosperity for everyone? Evidence suggests that most people …read more


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