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Piketty on inequality

Posted on June 14, 2014 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

''It is hard to imagine an economy and a society that can continue functioning indefinitely with such extreme divergence between social groups” – so writes Thomas Piketty on page 297 of ‘Capital the 21st Century’. The book is a serious read but not beyond the reach of most readers. It is very well written and accessible. I counted only a handful of mathematical equations in all throughout this 200,000 word book. Not bad for an economist whose book is becoming the ‘Book of the decade’. What Piketty has done is:

  • put the question of (economic) inequality back on the agenda more than ever in recent times;
  • gone about tracking trends in inequality – exhaustively – from available international and national data sources;
  • moved from mere analysis to policy recommendation – at the global level – by proposing coordinated international policy action in the field of taxation.

Not everyone will be comfortable with his analysis or prescription. Those on the (far) left will argue that Piketty neglects inequality in production (as in ownership of means of production) and not just income. They are likely to argue that he neglects the role of class struggle and mediating institutions in the 20th Century while concentrating on other factors. Moreover, critics on the left are likely to argue that his prescription of very high income taxes and coordinated wealth taxes is not politically feasible without a fundamental social transformation – replacing capitalism with socialism and not merely reforming or humanising the former.

Piketty’s critics on the right will take issue with his analysis and prescription by claiming that state intervention to equalise economic outcomes or opportunities was a failure in the past and is, in any case, neither desirable or politically feasible in the world that we live in. Curiously, critics from left and right share some common perspectives! Rather charitably, perhaps, Piketty writes:

“among the members of these upper income groups are U.S. academic economists, many of whom believe that the economy of the United States is working fairly well and, in particular, that it rewards talent and merit accurately and precisely. This is a very comprehensible human reaction”. (page 296).

One wonders what he might think of economists in Ireland!

Because Piketty has undertaken a huge sweep of analysis covering two centuries (and sometimes more) and number of countries for which data were available (principally the USA, Britain and France) he enables readers to acquire a bigger picture than analysis which is heavily constrained by reference to time, country or type of income or wealth. Piketty goes for the ‘big picture’ and in typical French style seeks a synthesis of evidence and theories to understand why particular trends and changes emerged at different points in history. His critics will, no doubt, find holes in the data. So far, they have not been able to undo his central theses. It should be said that Piketty is very up front about the limitations of the data he has worked with. To his credit the underlying data are available online (thus making it easy for those disturbed by his findings and above all by his policy recommendations to seek and find flaws or alleged flaws in Piketty’s use of data).

Unfortunately, in the case of Ireland, data are not readily available on long-term trends in income inequality. However, some data are available from the World Top Income Database (WTID). Professor Brian Nolan of UCD has provided important historical data to the WTID. The data shown in Chart 1 below is based on gross individual income (before deduction of taxes) at different points in time going back to the mid-1970s and including estimates for 1938 and 1943. The data suggest a trend towards growing inequality since at least the 1970s. However, when account is taken of the redistribute effects of taxation and social transfers inequality is much less and it is not necessarily the case that post-distribution income has increased that much, if at all, in the case of Ireland (Republic).  As for capital wealth there are no consistent or comprehensive data on distribution. Based on data in other countries, it is certain that wealth is more unequally distributed than income. (A detailed analysis of the options for a Wealth Tax in the Republic of Ireland is provided by my colleague, Dr Tom McDonnell here).

Chart 1 Estimated share of gross income by top incomes in the Republic of Ireland

 inequality

Source: Brian Nolan: ‘Long Term Trends in Top Income Shares in Ireland’; in Atkinson, A. B. and Piketty, T. (2007)

Piketty champions the notion of a tax on capital – albeit an internationally coordinated one. This is troubling for many current-day Irish policy makers because:

  • All taxes are viewed as ‘bads’ to be minimised as much as possible for the express purpose of the least necessary public service consistent with an internationally competitive low-tax regime (whether on incomes of corporations or individuals).
  • The present-day strategy is to rely very heavily on foreign inward investment including trade in financial services. Talk of a financial transaction tax or harmonised European-wide corporate tax is viewed as anti-patriotic and injurious to the material interests of thousands of children, women and mean dependent dependant for their livelihoods and income on footloose international capital.

‘Capital in the 21st Century’ is not a case for more taxation – at least in those parts of the world where taxation/government revenue (or public spending) is in the order of 50% (such as it is some European countries including France and the Nordic countries).  Piketty argues for better use of taxation and ‘modernisation’ of the social state (always an ambiguous term when it comes to social policy). What he does argue for is a global (or continental/regional) tax on capital wealth.

Whatever your views on inequality or Piketty’s work can I suggest that you undertake the following:

Tolle lege = Take and Read (Piketty). You might enjoy and learn from it as I have.

Posted in: IncomeInequality

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