Eric Falkenstein returns with a look at Piketty’s terrifying dystopia:
Growth was 3.8% in Europe in the Les Trente Glorieuses (“The Glorious Thirty”) of 1945-75, when marginal taxes and taxes on inheritance were higher, and income became more equally distributed
To him, the implication is obvious. Raise taxes back to what they were in the good old days of Les Trente Glorieuses to reduce inequality. The point of the tax is not so much to increase revenues but rather to “expose wealth to democratic scrutiny” (p. 471) and thus ”regulate capitalism” (p.518). As with all really popular nonfiction, it hits the zeitgeist because many think democracy and equality are paramount unalloyed objectives, a so a big book scientifically proving these noble objectives are under a vicious assault is highly welcome; nothing rallies the troops like news of an attack. Plus, the new tactic is refreshingly more feasible, as making the rich poorer is a lot easier than making the poor richer.
However, the good times he cherishes are what econometricians would call an overidentified event: there are several different correlates that could statistically ‘explain’ the 1950s. When I was growing up it was common for progressives to caricature the 1950s as a period of bigotry, materialism, and conformism, now those same progressives consider this a golden age; What if the key to reducing inequality is bigotry? Maybe econometrics shows we need to decimate, in the original Roman sense, our young men every other generation to make them hard working and less whiny.
Most importantly for his case is the fact that because marginal taxes, and inheritance taxes, were so high, the rich had a much different incentive to hide income and wealth. He shows marginal income and inheritance tax rates that are the exact inverse of the capital/income ratio of figures, which is part of his argument that raising tax rates would be a good thing: it lowers inequality. Those countries that lowered the marginal tax rates the most saw the biggest increases in higher incomes (p. 509). Perhaps instead of thinking capital went down, it was just reported less to avoid confiscatory taxes? Alan Reynolds notes that many changes to the tax code in the 1980s that explain the rise in reported wealth and income irrespective of the actual change in wealth an income in that decade, and one can imagine all those loopholes and inducements two generations ago when the top tax rates were above 90% (it seems people can no better imagine their grandparents sheltering income than having sex, another generational conceit).
For example, he writes that Lilian Bettencourt, the richest woman in France and heiress to the L’Oreal fortune (mentioned often, she serves as the archetype of the rich), never reported more than a $5MM annual income on a $30B fortune, a 0.02% annual return. Given his assumed 5% return on capital, and that given Bettencourt’s true returns have been above this average, this implies that it is clearly possible for reported income to stray from actual income by a factor of 100 for a long time. Given this feasibility and the incentives given by changing marginal tax rates and various corporate laws, it seems highly possible the whole U-shaped pattern in capital/income and top-decile-income/total income is just people sheltering their income at various intensities given the tax rate over the past century.
Thomas Piketty is the French equivalent of America’s Paul Krugman. Both are “brilliant” propagandists preaching to their choir on the left.