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Squeezing the rich

Thomas Piketty, a superstar economist, favours the introduction of a global wealth tax. Its impact might be surprisingly small

IN A speech in 2013 Barack Obama labelled inequality “the defining challenge of our time”. A few months later a book on the subject by Thomas Piketty, an economist at the Paris School of Economics, became an unlikely bestseller. It walked readers through centuries of data and a theory of inequality before leaving them with a bold policy recommendation: to prevent a dangerous rise in the concentration of wealth, the world’s governments ought to co-operate to enact a global wealth tax.
Egalitarian themes remain popular on campaign trails, but the wealth-tax idea has so far failed to gain ground. Yet in the right circumstances, might a “Piketty tax” emerge from the messy world of democratic politics? Two preconditions are in place. First, inequality within countries is soaring, as it was when progressive taxation first became widespread, in the early 20th century. Around the world top earners are gobbling up a larger share of income than they have for decades (see chart 1, left-hand side). Wealth has also rebounded. New research suggests that the share of wealth held by the top 0.1% of American households has leapt from about 7% in 1979 to as much as 22% in 2012.

Second, governments have piles of debt to pay down. Tax rates rose sharply as governments struggled to finance the second world war, then gradually fell in post-war decades (chart 1, right-hand side). In recent years, most of the continental economies that had in place an annual wealth tax repealed it. But government borrowing zoomed up again thanks to the financial crisis. Across the rich world debt as a share of GDP is 50% higher than it was before the financial crisis, on average (chart 2). When push comes to shove, those with the most will be asked to pay more.
How much more? Though Mr Piketty reckons taxes on the incomes of the rich should be 75% or more, his proposals for a wealth tax are generally modest. In his book he suggests that those with fortunes worth less than €1m ($1.1m) might pay nothing, while a tax of 1% would apply to fortunes between €1m and €5m, and 2% to those greater than €5m. Some speculate that a wealth tax of this sort could emerge as part of a deal to simplify America’s tax rules and reduce income-tax rates. In a column in the Wall Street Journal in 2012, Ronald McKinnon, a late, eminent economist, argued that American conservatives should support a wealth tax in exchange for cuts in other tax rates. He reckoned that high income taxes create poor incentives for productive workers, but could be slashed only if Democrats were offered a highly progressive wealth tax in return.
Following America’s lead
Impossible? Suppose America’s Congress were controlled by business-friendly Republicans keen to streamline the tax system and cut rates. And the White House were occupied by a Democrat open to tax reform but prepared to veto any bill without a strong progressive component. Congressional haggling could produce a wealth tax as the linchpin of a deal.

It would bring no great windfall. Data on personal wealth are patchier than income statistics—one of the reasons, Mr Piketty complains, why governments find it hard to tax wealth. But figures from America suggest that between 6m and 7m households, or about 5%, have a net worth (meaning the value of assets less debt) of more than €1m, and about half as many have a net worth of €2m or more. At present, in other words, a wealth tax like the one described by Mr Piketty might bring in a few hundred billion dollars a year, or a bit less than the federal government receives each year in corporate income-tax receipts. The numbers could be lower if households responded to the tax by reallocating their wealth from easily valued assets like equities to woollier ones, like rare antiquities, or if they found ways to exaggerate the apparent value of household debts, which reduce the value of taxable net wealth.
However, an American tax would put the power of its authorities, with their extra territorial reach, on the case. The Internal Revenue Service would demand that foreign governments keep better data on American wealth held abroad, and might threaten legal action against banks that refused to co-operate. As information accumulated about where and how much wealth was held across the globe, the temptation among foreign governments to tax those hoards would grow.


In economic theory, taxes on wealth are bad for growth, since they discourage saving and investment. But evidence from wealth taxes in Europe suggests the effect on growth and entrepreneurship is tiny. Asa Hansson of Lund University in Sweden calculates that a 1-percentage-point increase in wealth tax reduces growth by between 0.02 and 0.04 percentage points. If a wealth tax were a part of a bargain that trimmed personal and corporate tax rates, it is possible that neither growth nor wealth would be harmed much.
But nor would it qualify, strictly speaking, as a Piketty tax. To curtail growth in inequality, Mr Piketty reckons, a wealth tax must be paired with higher taxes on personal and corporate income, not adopted in exchange for lower rates. So for the full complement of egalitarian policies to be enacted, a third precondition must be met: a shift in political power. The wealth-compressing policies of the early 20th century were rooted in dramatic changes in the political landscape: the expansion of the franchise to those without property, and the explosive growth of the state in response to war and depression. They also included more than just tax; regulations shored up labour rights, while public investment and nationalisations nurtured public wealth at the expense of private fortunes.
That is the irony of Mr Piketty’s call to arms. A wealth tax that emerges in the absence of tectonic political change will not alter economic growth or the overall tax burden on the wealthy by very much.

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