Social Norms, Taxes, and Thomas Piketty

Capital in the Twenty-First CenturyI want to say a couple of things about Capital in the Twenty-First Century. I haven’t fully digested it. The first is from the beginning of the book. The very first graph in the book is, “Income Inequality in the United States, 1910-2010.” It is an extremely interesting graph.

Whenever I’ve looked at similar graphs in the past, what I’ve focused on is that inequality is actually higher now that it has been in the last century. But this time, what I focus on is how inequality comes crashing down during World War II and it doesn’t start coming unhinged again until the late 1970s:

Income Inequality History

There are a couple of things that do not seem to be going on here. First, this is really not about the top tax bracket. It had been raised steadily throughout the 1930s without much effect. But inequality was on a steep decline before 1942, when the income tax really went up. (It isn’t that the rate went high, but the income level at which it took effect was greatly reduced.) Then, in 1964, when the tax rate was greatly lowered, income inequality stayed pretty much constant. Finally, income inequality started to rise in the late 1970s — years before Reagan brought the tax rate down further.

(Here’s an interesting thing. In 1987, the top marginal tax rate was reduced to 38.5%. This is 1.1 percentage points lower than it is today. But it applied to all incomes over $186,000 in adjusted 2014 dollars. Today, the rate is $403,000. So income taxes on the wealthy are actually quite a lot lower today than they were then. Basically, we have exactly the same top tax rate as we had in 1993.)

The second thing to note is that this doesn’t really seem to be about unionization. I’m not saying that unions aren’t important, because I think they are hugely so. But in terms of unions, they don’t seem to be of critical importance to economic inequality itself. Union rates went way up in the 1930s, again without much effect on inequality. And then after the Taft–Hartley Act in 1947, we see a constant decrease in unionization, but income inequality stays at about the same rate.

What I think income inequality is all about is norms. During World War II and following it, it was just unacceptable for the rich to pay themselves ridiculous amounts of money. Of course, there were strong unions to enforce these norms. But there is no doubt that people like Ayn Rand and Ludwig von Mises have had their effect. Regardless, since the rich will not police themselves (and really, I don’t expect them to), we need confiscatory taxes. These are not taxes intended to raise money for government services, but rather just to change behavior. If you tax incomes over a million dollars at 95%, you will see far fewer people getting paid more than a million dollars a year.

The problem, of course, is that the rich have great incentives and abilities to game the system to avoid paying taxes. This is why Piketty pushes for an international wealth tax. This is basically a way of making money disappear over time. The reason conservatives love the idea of a gold standard is that if you put a kilogram of gold under your bed, in ten years you will still have a kilogram of gold under your bed. On the other hand, if you put a kilogram of potatoes under your bed, in ten years you will have nothing at all. It makes more sense to have money be more like food and less like gold. I would love to see that, but I’m not too hopeful in the near future.

The second thing I was struck with was Piketty’s discussion of public debt. He notes that there are three ways that public debt can be managed: taxes on capital, inflation, and austerity. What I find so interesting about this list is that the first two things are simply off the table. According to the Serious People, you couldn’t possibly tax capital or allow even modest inflation. They say it would harm the economy! And it would. A little. But the alternative is austerity: cutting government spending and raising taxes on income. But these harm the economy too. But instead of harming it a little, they harm it a lot.

We get stuck with bad economic policy because it is good economic policy for those who are already rich. And those who are already rich are the ones who control the conversation. This is ultimately the biggest problem that we face on the economic front. And it isn’t just the rich within different countries. It is also the way that rich countries treat poor countries, as discussed in Ha-Joon Chang’s Bad Samaritans. I know we will eventually solve these problems, I just don’t know how.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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