The dynamics of wealth distribution contain “no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.” – Thomas Piketty
I’ve recently become very interested in two radical financial innovations: a global tax on wealth, and a national universal basic income (or UBI). The first would limit the ability of the super-rich to buy their way to an oligarchy, while creating new revenue for social spending on education, health, or social security. The second would provide every person in a country with a guaranteed check every month ($1000 US according to Democratic candidate Andrew Yang), hopefully increasing creativity and entrepreneurial spirit while shrinking the average work week and removing financial strain from low-income workers.
My younger self would have tolerated a wealth tax, but hated the idea of a UBI. After all, I would have argued, work provides purpose and encourages responsibility, and our society already gives enough money to people consistently making terrible financial decisions. I wasn’t enough of a neocon to appropriate Reagan’s “welfare queen” language, but the resentment was there.
Permit me a short tangent: One time in bible college, when I was making around $30 a week working a few hours at the school library, I gave $20 to a classmate to help her buy a dress for the upcoming Christmas Banquet. When she instead used it to wax her eyebrows, I just about burst a blood vessel.
Obviously this proved to 19 year-old Paul that it was better to simply burn the money, KLF-style, than give it to people like my classmate.
But grad school has changed me. I increasingly wonder whether low-wage, low-skilled work, especially over the long term, has a net positive or negative effect upon the worker. I wonder why wages for certain, high-esteem jobs are increasing astronomically, while most of the population is being pushed towards precarious employment without the possibility of advancement. I wonder how, if the American dream is inherently egalitarian, the richest 1% of Americans can hold almost as much wealth as the entire American middle class, and nearly five times the wealth held by the poorer half of Americans.
I wonder whether eyebrow waxing (Threading? Trimming? Plucking?) is perhaps an essential part of self-care for some people, and shouldn’t be condemned.
Anyway, I’d like to use two books to explain wealth disparity – the problem a wealth tax is meant to solve – as well as why a UBI seems increasingly inevitable. The two books are Thomas Piketty’s Capital in the Twenty-First Century and Daniel Markovits’ The Meritocracy Trap. I recommend both books, although Markovits is a far more exciting read.
Let’s start simple:
What is wealth disparity?
A capitalist, market-based economy represents the most efficient system ever devised for creating wealth and allocating it effectively. Yet, as Piketty proves in his economic study of developed nations in the west, capitalism tends to concentrate wealth among the already wealthy, increasing the wealth disparity (as measured by the Gini co-efficient) between a rich minority and an exploited majority.
This concentration occurs because the rate of return on capital in a capitalist economy is always higher than the rate of increase on income. In fact, the more free and unregulated the market, the more quickly the rate of return on capital will outpace the rest of the economy, allowing those with capital to accrue an ever-increasing share of national wealth. As this wealth is reinvested into other assets, a small number of elites can quickly end up owning everything.
Karl Marx, bless his heart, was the first modern economist to predict this ‘principle of infinite accumulation.’ Marx wasn’t wrong in theory, but in practice safety mechanisms like knowledge diffusion, economic growth, and legislative protections prevent the infinite concentration of wealth. Still, while modern societies have managed to avoid a ‘Marxist apocalypse,’ deep systems of capital inequality have consistently pushed capital societies towards high levels of wealth disparity.
Most western nations avoided becoming oligarchies in the 20th century through a combination of high tax rates and economic growth (increased productivity and the addition of skilled, high-income jobs). Piketty argues that as long as the rate of growth of output and income exceeds the rate of return on capital (g > r), overall wealth disparity does not increase. Yet, as soon as the rate of growth falls below capital’s rate of return (r > g), a vicious cycle begins in which the wealthiest in society begin consolidating the economic control of the rest of society at an accelerating rate.
TL;DR: In a capitalist economy, rich people get richer at a faster rate than everyone else. This is generally balanced out by economic growth in the overall economy, but if that growth rate ever slips, then a market economy can quickly become an oligarchy.
How bad is wealth disparity right now?
Wealth disparity is almost as bad now as it was at the turn of the 20th century, when an incredible bubble in the stock market, along with an unrestricted global market, created massive wealth for those with the capital to exploit it. While the Great Depression (like the 2008 recession) temporarily decreased wealth disparity, it did not alter the fundamental trend.
According to Piketty, the only events in recent human history powerful enough to disrupt capitalism’s natural tendency towards wealth convergence were the World Wars, which forced states to mobilize public and private resources at unprecedented levels. Since we can’t simply start another global conflict whenever we need to decrease wealth disparity, it’s important to know why the wars were so effective at reducing private wealth at the top end.
The answer is that the wars created the social consensus necessary to implement progressive income and estate taxes (meaning that the tax rate progressively increased with the income amount) with top rates above 70%. According to Piketty, these progressive taxes are probably the reason that wealth disparity didn’t reach Bell Epoque levels for most of the 20th century, and only really began to increase significantly after the top tax rates were cut during the neo-liberal revolution of the late ‘70s and ‘80s.
While the US was the first country to experiment with high income and estate taxes, Britain tried the highest rates overall. At one point in the 1940s (and again in the 1960s), the tax rate on UK incomes in the highest category was 98%. Piketty concludes that the size of the decrease in top income rates in the US and UK since the 1980s has almost perfectly correlated with an explosion in top incomes. In other words, top CEOs, doctors, bankers, and financiers are more motivated to fight for larger incomes when the top tax rates are lower, creating a cycle of income inflation that drastically increased income disparity.
For example, here is a chart from Piketty on American income inequality between 1910 and 2010:
Financial deregulation has had a similar effect upon the ability of the rich and super-rich to accelerate wealth acquisition. Here is a chart graphing private wealth against national income in Europe. Note that private wealth in 2000 was valued at nearly six years of national income; it’s significantly higher than that today.
So we can solve wealth disparity by increasing income tax rates to immediate post-war levels?
No exactly. Piketty does say that the optimal tax rate in the top tax bracket (income above either $500,000 or $1,000,000 per year) in most developed countries is probably above 80%. Yet an income tax or estate tax alone is no longer adequate for combatting inequality because there are too many ways to avoid both taxes.
For example, according to economist Gabriel Zucman, both the developed world and developing world are currently net debtors – which makes no sense because it implies (as Piketty wryly notes) that the world is currently borrowing money from some place like Mars. In fact, the global economy is a net debtor because roughly 8-10% of global wealth is currently hidden away in tax havens, and therefore cannot be taxed. This is in addition to the many technically legal ways the wealthy have to cut down on their tax burden.
By consequence, many extremely wealthy people end up paying taxes at lower rates than their middle class peers. This is a form of theft from the state, since it allows the wealthy to basically set their own tax rates. Additionally, since most developed countries are currently carrying high levels of public debt, less wealthy citizens paying more taxes end up spending proportionately more servicing that debt. Since it is wealthy who own most of that debt, Piketty argues that public debt is largely a redistributive mechanism to funnel wealth upwards to the most wealthy.
What’s Piketty’s recommendation?
In Piketty’s words “The primary purpose of the capital tax is not to finance the social state but to regulate capitalism.” By taking a few percentage points of wealth each year on the biggest fortunes, it restricts capital’s ability to accelerate wealth concentration.
Piketty arrives at a wealth tax by eliminating other possible options. Protectionism depresses global trade and doesn’t combat domestic inequality. Capital controls are illiberal and require China-like levels of state intervention. Immigration from poor areas to rich areas can increase wages, but doesn’t address core issues of inequality – often inciting a nationalist backlash from the middle and lower classes in developed nations (who don’t receive the direct benefits of free trade in people and capital).
Piketty recommends a progressive annual tax on wealth. His recommended rates would be 1% on net wealth between 1 and 5 million euros (sorry, he’s French), 2% on income above 5 million, and optional steeper tax on fortunes above 1 billion euros. He also considers an optional tax of 0.1% on wealth between 200,000 and 1 million euros. This would obviously be in addition to (not in replacement of) current income and estate taxes.
In order to make a wealth tax feasible, states would need to make it more difficult for wealthy individuals to hide their assets offshore. In a perfect world, financial institutions around the world would work together to create complete financial transparency, but this is unlikely to happen. More realistically, regional blocs like the EU would cooperate to create internal transparency, and use their combined leverage to force notorious tax havens to cooperate (Switzerland and Luxembourg, we’re looking at you). Previous national wealth taxes in smaller states like France or Italy have failed largely because the wealthy were too easily able to evade them.
Why should anybody care about complicated tax laws?
The idea that a free and unregulated market is the most efficient way to increase wealth across the social spectrum is a lie. A free market is incredibly efficient at realizing the interests of those who control the market, which is only partially also in the interest of the general population. Political actors are necessary to constrain capitalism’s general trend towards monopoly and wealth concentration, yet they need to remain obedient to society’s liberal and democratic values. A wealth tax meets both of these objectives.
Despite what Marx said, societies which do not address wealth disparity almost never end up being owned entirely by a few capitalists. This is because people are not perfect economic agents. Instead, increasing wealth disparity leads to political polarization, violence, populist and nationalist sentiments, and, occasionally, revolution. In other words, a wealth tax (as Elizabeth Warren is currently arguing) is a political tool to address the economic alienation and inequality which seems to be a primary motivation for movements like Trumpism in the US, or ethnic nationalism in Europe.
I urgently support a wealth tax because I believe that economic justice is a necessary component in social justice. In other words, condemning Uncle Pete for his racist political viewpoints without acknowledging his economic alienation is an exercise of significant privilege. Uncle Pete should be confronted about his views, but Uncle Pete is also a victim in his own right. If you can’t see that, then there’s some Uncle Pete in you too.
I’ve often wondered if anti-immigration rhetoric is as much about neoliberal economic policy as it is about patriotism or racism. But I’ll leave further exploration of that controversial idea for my discussion of Markovits’ book in Part Two.