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by Will Hutton
Monday, Sep. 01, 2014 at 5:40 AM
The wealth of others has become more a problem and less an incentive. Capital is blind, Thomas Piketty says. Capital grows faster than the economy. Differences in wealth are inherent in capitalism but do not represent a natural law. A society can accept them or act against them.
WEALTH AS A PROBLEM
Only a top tax rate of 80 percent can save us. Thomas Piketty’s controversial criticism of capitalism
By Will Hutton
[This article published 5/14/2014 is translated from the German on the Internet, https://www.freitag.de/autoren/der-freitag/reichtum-als-problem.]
A new economist who is not from the political right-wing enlivens the discussion. Whoever participated in the recent conference on new economic thinking in Toronto witnessed how the name Thomas Piketty and his book Capital in the Twenty-First Century was mentioned at least once in every lecture. The French economist unknown up to now was even praised by the Nobel Prize winners Paul Krugman and Joseph Stiglitz.
One has to go back to the 1970s and to Milton Friedman to find an economist with similar influence. Like Friedman, Piketty is a child of his time. Anxiety replaces fear of inflation today, the anxiety that the influence of the super-rich on our economy and society has become too great. Piketty does not doubt that the increasing inequality of wealth has reached an extent that endangers the future of capitalism itself. He can even prove that.
His thesis may displease those who think a successful production method presupposed the inequality of living- and income conditions. Capitalism needs unequal distribution of wealth as an incentive. Only in that way can risks be accepted and personal effort undertaken, the neoliberal economic credo declares. The state kills the goose that lays the golden egg when it tries to regulate the free market through excessive taxes on wealth, capital, inheritances and property.
Piketty is an empiricist. With economic data and tax registers from the last 200 years, he shows how the wealth of others has become more a problem and less an incentive. Capital is blind, he says. Capital grows faster than the economy when the returns – in the form of any kind of re-investments – whether in apartments or factories – exceeds the real growth of wages and production. That was always true in history except for a few phases, for example between 1910 and 1940. The inequality of wealth increases exponentially.
This process is intensified through inheritances and grotesquely overpaid “super-managers” particularly in the US and Great Britain…Piketty’s thinking is guided by the knowledge that such differences in wealth are inherent in capitalism but do not represent a natural law. A society can accept them or act against them.
The inequality of wealth in Europe and the US is twice as great as the inequality of incomes. The richest ten percent own between 60 and 70 percent of the total assets but only 25 to 35 percent of the total income. This concentration of wealth already existed before the First World War and goes back to the late 19th century. Coming into an inheritance represented the dominant element in the economic and social life.
A constant interrelation exists between wealth and income. Great wealth means earned income is supplemented by unearned capital income. The spiral of inequality is fueled again. Piketty’s book strikes in the US like a bomb because it thoroughly destroys the meritocratic myth (“Only performance counts,” “Every dishwasher can become a millionaire”) and stands up for the Matthew effect: whoever has will be given more.
The wastefulness and enormous social tensions of Edwardian England, the France of the Belle Époque and the America of the robber barons always seem to belong to the past. However Piketty shows that the phase between 1910 and 1950 when inequality decreased represents an exception. War and depression re-started the dynamic of inequality and at the same time brought the insight in the necessity of high taxes on high incomes, particularly income from assets, to maintain the social peace. The process of blind capital that multiplies faster and faster in fewer and fewer hands is underway again on a global scale – with possibly fatal consequences, as Piketty writes.
With the exception of one or two spectacular Silicon Valley startups, there is hardly an entrepreneur who can accumulate so much capital that would put in question the incredible concentration of wealth. In this sense, “the past devours the future.” Significantly, the Duke of Westminster and the Earl of Cadogan are two of Britannia’s richest men. They owe their wealth to the fields in Mayfair and Chelsea owned by their families centuries ago and the unwillingness to close the loopholes so their family wealth continued growing.
NTEREST AND COMPOUND INTEREST
Everyone with (property) assets in branches where returns are higher than the economic growth quickly becomes richer and richer. The incentive to live from interests and incomes is greater than taking a risk. Consider only the explosive increase of rental property. Our businesses and rich persons do not need to promote innovations. They do not have to invest. All they need to do is pocket their returns and tax relief. Tax havens and compound interest accomplish the rest. The capitalist dynamic is undermined. Other forces reinforce this effect. Piketty shows how easy it is for the rich to evade taxation and emphasizes the share in tax revenue borne by middle class persons rises again and again. Even if the top one percent in Great Britain pay a third of all income tax, the income tax only amounts to 25 percent of all tax revenue. 45 percent comes from value-added or sales taxes, consumer taxes and insurance fees paid by the vast multitude.
Thus the average taxpayer must pay even more robustly for maintaining public services like education, health care and house building. The inequality of wealth leads to a profiteer economy hostile to innovation that falters and to more onerous working conditions and deteriorating public service. This may not matter to the rich. They distance themselves more and more from the rest of society not through merits or hard work but simply because they have capital that yields more returns than wages in the long term.
History shows societies in trouble try to protect themselves. They close their borders. Revolutions or wars occur. Piketty fears this could be repeated. His critics reply the aversion toward the super-rich will recede with a higher living standard of the whole population – and they have long decried the flawed data and false information – without success. People have not lost their innate sense of justice. Obviously it is manifest very differently. The growing Scottish nationalism is fed from the desire to bu9ild a country where wealth is not distributed as unequally as in England.
Piketty proposes bold solutions: a top tax rate up to 80 percent, an effective inheritance tax and a global wealth tax. This is presently inconceivable. However the challenge is to move these measures into the realm of the conceivable according to the economist Piketty. His book undoubtedly makes an important contribution to this.
Myth #1: “The state wastes tax funds”
Myth #2: “Our tax money seeps away in the social bureaucracy”
Myth #3: “Taxes, state and bureaucracy grow rampantly at the expense of citizens”
Myth #4: “Taxes brake growth and are poison for prosperity”
Myth #5: “Germany is a high tax country”
Myth #6: “Top earners face the heaviest tax burdens”
Myth #7: “The top income brackets bear the bulk of the tax burden”
Myth #8: “Wealth taxes strike the middle class”
Myth #9: “Record business taxes endanger the location Germany”
Myth #10: “The financial transactions tax strikes small investors and pensioned savers”
Myth #11: “One tax record follows another for the German treasury”
Myth #12: Tax cuts finance themselves”
Myth #13: “Higher top tax rates impair growth and employment”
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