Capital in the Twenty-First Century

Capital in the Twenty-First Century by Thomas Piketty and Arthur Goldhammer, trans. Harvard University Press, 2014.

Where to begin talking about this amazing book? Thomas Piketty argues that the degrees of inequality of both wealth and income may in the coming decades reach the levels prevailing in France and Britain in the Belle Époque from 1870 to 1914 but not since then. To understand why that may occur, one must visit the intervening century with all of its traumas – and inequalities.

Piketty’s title makes reference to Karl Marx and his Das Kapital (1867). Like his illustrious predecessor, Piketty might be accused of stirring up “class hatred.” But that is not Piketty’s purpose. Rather it is to examine measures to reduce the growing inequality in the name of saving capitalism in its democratic environment.

France and Britain, figure prominently in his analysis of capitalism. They provide the longest running statistical series, and Piketty has fashioned them into numerous, informative graphs and statistical tables.

Capital comes in different forms, and they have changed over the course of the twentieth century.  In 1870 European capital was largely agricultural and financial – bonds and stocks. Frenchmen – particular Parisians – and Brits felt comfortable in placing their capital abroad – in North American railroads and Russian sovereign debt, for example. These owners of capital lived on fixed incomes from that capital and cashed in some of it occasionally, to pay for a desired life-style. Much of it, however, was passed on within families. Consumption was not yet the bane of family fortunes.

By way of contrast in the mid-1900s most capital assets were in the form of urban housing, industrial plant and machinery, businesses and business inventories, and natural resources.

Family wealth is only partially from inheritances; it also benefits from the huge inequalities of wage income, ‘executive pay,’ for example. The defenders of this disparity in wages argue that it mirrors a meritocracy. Piketty contends, however, that there is no statistical evidence of a contribution to national productivity sufficient to justify today’s wage inequality.

To illustrate his argument that wealth inequality in the U.S. has been increasing since the 1950s, he divides the owners of wealth into four brackets, top 1.0%, 10.0%, 40.0%, and the bottom 50.0%.  Particularly outrageous are the gains in the percentage of total wealth that the top .01% have acquired. By way of contrast, the lower 50.0% of the distribution own a tiny 5.0% of the wealth.

Those in the 40.0%, bracket he names “the new proprietary middle class.” They have gained through ownership of urban housing, but also income from wages, though nothing like the top 0.01%, 1.0%, or 10.0%. Piketty’s analysis would suggest, however, that the democratic environment of capitalist economies has resulted in the rising economic and political clout of this proprietary middle class.

Inequality of income from both capital and labor has varied over the twentieth century. It was considerably less during the ‘shock’ to capitalism resulting from two world wars and the intervening depression, 1914 to 1945. These wars were financed by disportionately heavy taxes on the rich.

One interesting question raised. How should ‘human capital’ – the stock of knowledge, talents, skills, experience, and training – be reckoned, and how should it be compensated? Should it be considered a capital gain or should it be considered a wage? Is ‘human capital’ over-compensated by the present capitalist structure? The bottom 90% are assured by the wealthy that human capital is a worthwhile investment opportunity because it brings upward social mobility, for the individual, even though it does not redistribute either income or wealth.

Piketty argues that recent reductions in the progressive nature of income and estate taxes have made it more likely that the best opportunity for anyone with or without human capital is to have inherited wealthy parents.

He proposes that we should temper the growing inequality of wealth and income by taxation. He recommends a progressive but low tax on all forms of capital, perhaps 1.0 to 2.0 %. It would be much like the present property tax, which in Alachua County, Florida is about 1.5% of the assessed value of the property – land and buildings.  Remember this is a tax on an asset, not a tax on the income from that asset, and it is regressive in terms of wealth concentration.

Florida once had a tax on various forms of intangible assets – stocks, bonds, mutual funds, and capitalized assets such as copyrights, goodwill, intellectual property, etc. After a generous deduction, the rates were from 0.2% to 1.0%. It was gradually abolished by the Republican-controlled Florida Legislature as unfair to heirs. Good luck with your tax on capital, Thomas Piketty!

Piketty does not think that a tax on wealth should replace either estate or income taxes, but those taxes should be reformulated along with the introduction of a tax on capital. And all should add up to a “return to the State” adequate for financing education, health services, defense, replacement income, and various transfer payments.

Capital in the Twenty-First Century was briefly a best-seller, a credit to both Piketty and to the reading public.

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