Wednesday, May 14, 2014

What Can Be Done About Growing Inequality?

Piketty's book has shifted the debate about growing income inequality.  Critics on the left and the right find his evidence about growing income inequality compelling.  It does not appear that rich states can increase the rate of growth beyond 1.5% over the long run.  Consequently, the rate of return on capital will remain much higher than the growth rate.  Therefore, inequality is inevitable unless something can be done about it.  Piketty, of course, argues for a progressive tax on wealth but that solution presents many problems.  It is politically difficult; It would be hard to implement, and it requires global cooperation.  This leads liberal critics to complain that Piketty's book tells us that capitalism is bad, but that we can't do anything about it. 

Critics on the right have accepted the idea that something should be done about rising inequality and they have begun to offer their solutions.  Ken Rogoff urges us to consider a progressive tax on consumption along with a more progressive payroll tax.  He also suggests a moderate tax on inheritance.  Clive Crook favors a tax on capital income as well as a more progressive inheritance tax.

It would appear that politicians on the left and the right will make an attempt to deal with the concerns that the public has about growing inequality.  Americans tend to admire entrepreneurs like Bill Gates and Steve Jobs.  On the other hand, they don't like the prospect of "patrimonial capitalism" that has been raised by Piketty's book.  That may be a more effective target for politicians to attack.

I would like to correct a couple of misconceptions about Piketty's proposal for a wealth tax in this article.  Piketty believes that a wealth tax in Europe would require cooperation between the nation states in Europe.  However, he believes that America is powerful enough to make changes in its tax system without the need for global cooperation.  Moreover, Piketty is not pessimistic about the prospects for change. There have been many changes in tax policies over the years.  Timing is critical.  Politicians have been able to make dramatic changes under the right conditions.  For example, the tax system was made very progressive in the US following the Great Depression and World War ll.  Beginning in the 1980's the tax system was made less progressive.  If one looks at the combination of federal, state and local tax policies, the US tax system is only slightly progressive. There is a lot of room for an increase in the progressiveness of the tax code.

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