Inequality will worsen in America unless… Piketty’s Rx

BY Thomas Piketty  May 12, 2014 at 4:42 PM EST
In his best-selling book, "Capital in the Twenty-First Century," French economist Thomas Piketty predicts inequality will worsen in America. So what does he recommend doing about it? Above, Piketty speaks at King's College in April. Photo by LEON NEAL/AFP/Getty Images.

In his best-selling book, “Capital in the Twenty-First Century,” French economist Thomas Piketty predicts inequality will worsen in America. So what does he recommend doing about it? Above, Piketty speaks at King’s College in April. Photo by LEON NEAL/AFP/Getty Images.

Editor’s Note: Thomas Piketty. The French economist is on the tips of Americans’ tongues. His best-selling book, “Capital in the Twenty-First Century,” has sold so many copies in America that Harvard University Press has had to send it back to the presses for another printing. By now, most readers know Piketty’s thesis projects inequality is worsening. But what does he think can be done about it? Read more about Piketty’s vision for progressive taxation, including an international tax on capital, and a higher minimum wage in his extended conversation with Paul Solman below. And catch Paul’s interview with Piketty, which aired on the NewsHour Monday.

Simone Pathe, Making Sen$e Editor


Paul Solman: What are your prescriptions for the inequality you observe?

Thomas Piketty: Different countries always invent different ways to deal with extreme inequality. In China or Russia, for example, they tolerate extreme inequality and then suddenly put some wealthy oligarchs in jail. A much more efficient way to regulate extreme inequality is to have a tax system that allows everyone to enter the wealth distribution and that puts limits on the concentration of wealth.

Paul Solman: So how do you do it?

Thomas Piketty: Right now, the taxation of property in the U.S. is proportional to your real estate property and doesn’t take into account your mortgage or your financial assets.

Paul Solman: It’s not how much equity you have in the house, it’s just how much the house is worth on the open market — you pay a percentage of that?

Thomas Piketty: Right, so sometimes, actually, your mortgage is higher than your property value, so you have a negative net worth, but you’re still paying the same property tax. It’d be better to have a progressive tax on net wealth, so that, in effect, we would reduce the property tax for the bottom 90 percent of Americans.

We need to return to the type of progressive income taxation that we’ve had in the past, which did not kill U.S. economic growth. U.S. economic growth was actually higher before the 1980s than it has been since then.

Paul Solman: Well, as you point out in the book, the top marginal tax rate in the United States was above 90 percent starting in the 1930s, all the way through until Kennedy in the early ’60s, and then it was still in the 70s all the way to 1980, right?

Thomas Piketty: You have inequality everywhere except in the growth statistics; the performance of the U.S. economy since 1980 has been 1.5 percent per capita GDP growth. If two-thirds or three-quarters of this growth goes to the top 1 percent, this is not a good deal for the rest of the population.

Paul Solman: Well my friend, [former Ronald Reagan economist] Arthur Laffer, would say, look at the 1920s, when they dropped the top marginal rate to 25 percent. We had the roaring ’20s. Isn’t that a counter example?

Thomas Piketty: This ’20s episode lasted for two years. Several decades of robust growth in the ’50s, ’60s and ’70s was not made impossible by progressive taxation. And this high progressive tax rate would only apply to enormously high incomes, like several million dollars. At this level of income, you are not really rewarding productivity of performance, you are rewarding greed or sometimes excessive risk-taking by the financial system, which is of no use for the real economy.

Paul Solman: One critic of yours, Jamie Galbraith, at the University of Texas, says it’s the “financialization” or the “Wall Streetization” of the American economy that actually explains this high return on capital that you make so much of.

Thomas Piketty: I agree with him. Financial de-regulation is a big part of the rising inequality story, both because of very high incomes in the financial industry and also because of the inequality in rates of return, for owners of large portfolios, which have access to very sophisticated financial assets, and the middle class, which sees lower returns.

Paul Solman: So you want an international capital tax?

Thomas Piketty: We need more global coordination. The G20 Summit has said for many years now that we need to fight tax havens. You know many people five years ago thought that this was impossible?

What we’ve seen with Switzerland in recent years is that if we put in place adequate sanctions, we can get the country legislation to change and bank secrecy to be reformed.

It’s not Utopian to believe that we can create a global registry of financial assets so we know who owns what in different countries.

Paul Solman: And then tax everybody who has wealth?

Thomas Piketty: Our national income tax system certainly tried to tax the return to everybody who has wealth, but it’s very difficult to do it properly if you don’t know who has wealth abroad in foreign banks. We need this kind of international cooperation to receive the information about who owns what in different countries.

Paul Solman: But an international tax on capital, on accumulated wealth, doesn’t that threaten the sovereignty of countries because it would have to be something managed, coercively, internationally?

Thomas Piketty: No, of course not. I’m talking about cooperation between existing governments. I’m not talking about world governments. So for example, the Transatlantic Trade and Investment Partnership could include automatic exchange of bank information and a global registry of financial assets so that U.S. tax authorities know which of their citizens have assets in Luxembourg, in London, in Paris and the same for European tax authorities. Each government will have their own tax system, but I believe the U.S. government and EU government should grow closer to have more political and fiscal integration.

Because of sanctions on Swiss banks, Switzerland is starting to cooperate. This is just the beginning of a very long process. Ultimately, the United States and European countries can certainly manage to make this happen.

Paul Solman: Anything else you would do? What about stronger unions for example?

Thomas Piketty: Union decline came largely by a change in the production structure and a shift from large manufacturing units to smaller production units in the services. It wouldn’t be easy to return to the same kind of union structure. But in many countries, like Germany and the United Kingdom, you’ve seen in recent years, a move to stronger minimum wages. Because of weaker manufacturing sectors, the minimum wage can play a bigger role than it used to be.