I seldom use the New York Times sociological columnist, David Brooks, as a source for my blog posts because I am focused primarily on economic and fiscal issues. But his column today, “Saving The System,” is highly pertinent to my message. “All around, the fabric of peace and order is fraying. The leaders of Russia and Ukraine escalate their apocalyptic rhetoric. The Sunni-Shiite split worsens as Syria and Iraq slide into chaos. China pushes its weight around in the Pacific. … The U.S. faces a death by a thousand cuts dilemma. No individual problem is worth devoting giant resources to. But, collectively, all the little problems can undermine the modern system.”
In addition to all of these pesky worldwide problems, our free enterprise economic system is under siege. Wages have been largely stagnant since the early 1970s and income inequality is growing as the top 1%, and perhaps the top 10 or 15% as well, do much better than everyone else. And just lately we have also learned from the French economist, Thomas Piketty, that wealth inequality has been growing steadily ever since about 1950 and is likely to get substantially worse in the future.
In other words, western civilization is under threat in more ways than one. What are we going to do about it? At the risk of oversimplifying, I believe that the single best thing we can do is to undertake fundamental tax reform to make our economy stronger. Cut everyone’s tax rates and pay for it by closing loopholes and deductions which primarily benefit the wealthy.
Lower tax rates will put more money in the hands of the two thirds of Americans who don’t itemize their tax deductions. These are largely the same people with stagnant wages and so they will spend this extra income they receive.
The resulting increase in demand will put millions of people back to work and thereby increase tax revenues which will help balance the budget. This shift of income from the wealthy to the less wealthy will reduce income inequality.
Although harder to implement politically, a low (between 1% and 2%) wealth tax on financial assets above a threshold of $10 million per individual, would be a highly visible way to address wealth inequality. The substantial sum of revenue raised by this method could be used to fund national priorities as well as paying down the deficit.
I don’t want to leave the impression that I consider this program to be a panacea for strengthening our country. But it would help and we need to make some big changes to maintain our status as world leader.
This morning’s Wall Street Journal has a book review by the New York fund manager, Daniel Shuchman, “Thomas Piketty Revives Karl Marx for the 21st Century” of Thomas Piketty’s new book “Capitalism in the Twenty-First Century.” As I recently discussed, Piketty makes the simple observation that income from wealth, i.e. investment income, grows faster than income from wages or GDP. He then provides a large quantity of data showing how this has played out since the end of WWII. He plausibly predicts that the value of private capital as a percentage of national income will continue to grow indefinitely into the future. This much is straightforward. The question is how we should react to a steadily increasing and very large concentration of wealth in the hands of a small percentage of people. Mr. Piketty’s own idea is, for example, to establish an 80% tax rate on incomes starting at “$500,000 or $1,000,000” in order “to put an end to such incomes.” Mr. Shuchman attempts to discredit Mr. Piketty by focusing in on such socialistic views for dealing with the problem rather than discussing the intrinsic merit of Piketty’s basic thesis about the buildup of great wealth in the first place.
My own view is that Mr. Piketty has clearly identified a weakness of capitalism and that it behooves supporters of free markets and private initiative to address this problem in a constructive way, for example, as follows.
We need fundamental broad-based tax reform, i.e. lower tax rates in exchange for closing loop-holes and lowering deductions, in order to boost the economy and create more jobs. As part of a major tax overhaul, we could also establish a relatively small wealth tax, of about 1% or 2%, on assets over $10,000,000, which would raise as much as $200 billion per year. This much money could be used to begin a large scale program of infrastructure renewal as well as leaving a lot left over to make significant payments on reducing our annual deficit.
Such an overall plan would address both income inequality and wealth inequality in a highly visible manner while simultaneously helping our economy.
The French economist Thomas Piketty is creating a huge stir with the publication in English of his new book “Capital in the 21st Century.” Mr. Piketty develops a very simple idea, with reams and reams of data. Namely that income from wealth, i.e. investment income, typically grows faster than income from wages and GDP. This means that the value of private capital is growing steadily as a percentage of national income. This trend has been occurring ever since 1950, at the end of WWII, and is likely to continue indefinitely absent new mega shocks to the global economy such as another world war. In other words, wealth inequality is rapidly increasing just as is income inequality. Today’s New York Times has an interesting article “Taking on Adam Smith (and Karl Marx)” discussing Mr. Piketty’s background and how it has influenced his research. “No revolutionary, Mr. Piketty says that inequality by itself is acceptable to the extent it spurs individual initiative and the generation of wealth. But extreme economic inequality, he contends, will have a deep and deleterious impact on democratic values,” says the reporter.
Now that income inequality and wealth inequality are clearly well documented, the question is how our democratic society will respond through the political process. First of all, we need to agree to take the problem seriously. Equality of opportunity and economic mobility still exist but it is getting harder and harder to move up the income ladder. What our country badly needs right now is an economic program that will get our economy growing faster in order to create more jobs as well as bringing in more tax revenue to pay for government.
One way to accomplish this is with
Broad-based tax reform to lower rates in order to put more money in the hands of people who will spend it on basic necessities as well as business expansion. Lower rates can be paid for by closing loopholes and deductions which primarily affect the wealthy.
A low percentage (1% or 2%) tax on wealth (i.e. financial assets) with a fairly high personal exemption of perhaps $10 million in order to only include the most wealthy. This would raise about $200 billion per year which could be used to fund a wide scale infrastructure renovation program which would provide employment to millions of people.
Such a wealth tax would be a highly visible means of addressing economic inequality in a way which would greatly benefit to the economy at the same time.
The subject of income inequality has generated much interest and concern in recent months. Now we will also be hearing a lot about wealth inequality, based on the highly credible new work, “Capital in the Twenty-First Century” by the French economist, Thomas Piketty. The New York Time’s Eduardo Porter, summarizes the basic message in his recent column “A Relentless Widening of Disparity in Wealth”, which is clearly displayed in the two charts below. The value of private capital as a percentage of national income worldwide has been growing steadily since about 1950 and Mr. Piketty predicts that this trend will continue indefinitely. The trend is equally true, not only in the U.S., but also in other developed countries as is illustrated in the chart. It happens because the income from wealth, i.e. return on investment, typically grows faster than wages and GDP.
As Mr. Porter says, “It means future inequality in the United States will be driven by two forces. First of all, a growing share of national income will go to the owners of capital. Of the remaining labor income, a growing share will also go to the top executives and highly compensated stars at the pinnacle of the earnings scale.”
This trend has now been in effect ever since 1870, with the exception of the period between World War I and World War II, when a massive amount of wealth was destroyed. The forces of globalization and growth of technology are contributing to both types of inequality, especially in the developed world (see my post of January 23), and these forces will almost surely continue unabated. So the wealth and income inequality gaps are just going to keep getting worse.
How much inequality can exist in a democracy? The number of losers (the low income, the poor, and even the struggling middle class) will gradually get bigger and bigger and will become more and more frustrated and express their discontent at the ballot box. This threatens the future of capitalism and free enterprise, the economic principles on which our way of life is founded.
Something has to be done! Stay tuned for my next post!