Bill Gates washes his own dishes, as we learned this year from his Ask Me Anything session on Reddit, but he’s certainly not trying to save money. The world’s richest person is doing everything in his power to decrease his fortune. He stopped working for a living. He sold most of his stake in Microsoft (MSFT). And he’s poured $28 billion so far into the family foundation, which is fighting AIDS, polio, tuberculosis, and hunger. Despite all that, Gates’s pile keeps getting higher. His wealth as of April 8 totaled $79 billion, according to the Bloomberg Billionaires Index. That’s up $16 billion in just the past two years.
Gates is just the most extreme example of the polarization of wealth in the U.S. The top hundredth of 1 percent of U.S. taxpayers—that’s 16,000 people—have a combined net worth of $6 trillion. That’s as much as the bottom two-thirds of the population. Meanwhile, a quarter of American families say they have no money in a checking or savings account to cover an emergency, according to Bankrate.com (RATE).
The growth of inequality can sometimes feel as inexorable as the subterranean shifting of tectonic plates. It may be driven by powerful forces, but ultimately it’s a choice, not a fact of nature. What allows Gates to keep getting richer in spite of himself is a web of human-designed institutions and practices, from the tax system to patent law. So the question is not whether society can reduce inequality, but whether it wants to. If the answer to that is yes, the next question is how.
Thomas Piketty, a 42-year-old professor at the Paris School of Economics, has scored a surprise publishing hit, Capital in the Twenty-First Century, that proposes an unusual, possibly impractical, yet intriguing response to what he calls “the central contradiction of capitalism”: the tendency of wealth to grow faster than the gross domestic product, creating inequality that undermines democracy and social justice.
In a review last year, World Bank economist Branko Milanovic wrote that “we are in the presence of one of the watershed books in economic thinking.” In March, New York Times columnist Paul Krugman wrote that Piketty’s 685-page tome “will be the most important economics book of the year—and maybe of the decade.”
Owners of assets such as empty lots might be more likely to put them to good use if capital were taxed
Most of the coverage of Piketty’s book has focused on his diagnosis, but the most interesting part is the cure. He proposes a global tax on capital—by which he means real assets such as land, natural resources, houses, office buildings, factories, machines, software, and patents, as well as pieces of paper, such as stocks and bonds, that represent a financial interest in those assets. In his terminology, capital is essentially the same as wealth. So taxing capital is taking a chunk of rich people’s money. His tax would start small but rise to as high as 5 percent to 10 percent annually for fortunes in the billions. The proceeds in Piketty’s view should not fund an expansion of government: “The state’s great leap forward has already taken place: there will be no second leap—not like the first one, in any event,” he writes.
It doesn’t take a Ph.D. to see that Piketty’s tax is a far stretch—or in his words, “utopian.” Today most countries tax the income produced by wealth—dividends, rents, capital gains—but they don’t go after the wealth itself. Doing so smacks of confiscation, which was widely practiced in the French Revolution but not the American one. Even if Congress did pass a wealth tax, the IRS would have trouble collecting because the wealthy might transfer title to their assets abroad. Piketty recognizes that, which is why he insists that the tax be global. But getting every tax haven on earth to tax equally and to share data is highly unlikely.
Spain has a wealth tax of up to 2.5 percent of assets but keeps trying to repeal it. France also has a “solidarity” tax on wealth, but it causes more capital flight than the government earns in revenue, according to tax expert Eric Pichet of Kedge Business School in Marseille and Bordeaux, France. “This is typically a French utopia (as you probably know, we are the unquestionable leaders in this field …),” Pichet wrote in an e-mail.
Boston University economist Laurence Kotlikoff prefers a tax on consumption, which he says effectively shrinks great fortunes by decreasing the value of what each dollar or euro can buy. Of Piketty’s plan, Joel Slemrod, a University of Michigan tax economist, says: “I’m the kind of person who doesn’t spend too much time on policy proposals that have zero chance of happening, and I think this is one of those.”
Still, Piketty’s global tax has features that make it worth pondering as a thought experiment if nothing else. For one thing, it gets the incentives right. If a global tax on capital were imposed, owners of valuable assets such as empty lots might be more likely to put them to good use, or sell them to someone who could, to cover the tax bill. (American writer Henry George had the same idea in the 19th century with his famous single tax on land, designed to reward development but not speculation.) For another, a wealth tax captures resources that other taxes miss. The income tax doesn’t cover unrealized capital gains, which represent the bulk of the wealth of people such as Gates, Warren Buffett, and Carlos Slim. Stanford University economist Ronald McKinnon wrote a 2012 Wall Street Journal op-ed called “The Conservative Case for a Wealth Tax.” (He now says his tax would be lower than Piketty’s, and flat, not rising with wealth.)
Early in his career, Joseph Stiglitz, the Nobel prize-winning economist at Columbia University, wrote a much cited paper concluding that if certain economic conditions existed, then there would be no justification for taxing capital. I ask him about that paper. He says the conditions he identified don’t exist in the real world—which is why he’s sympathetic to Piketty’s ideas. “By clarifying the conditions under which you wouldn’t tax capital,” he says, “it helps clarify the reasons why you would.” For example, some of the greatest fortunes are built at least in part on monopoly power. If the government doesn’t bust up monopolies, Stiglitz says, it can achieve similar results by taxing away their “rents”—i.e., excess profits.
Piketty isn’t willing to concede that his wealth tax is dead on arrival. In an e-mail exchange, he said, “First there’s a lot countries can do on their own. It would be very easy in the U.S. to turn the property tax into a progressive tax on net worth. In effect, we would be reducing the property tax on people with little net wealth (because of large debt) and raising it on people with high financial wealth.” He added: “I understand that many people don’t want this to happen, just like many people did not want the progressive income tax to happen around 1900-1910; but it did happen.” As for capital flight, he said tax havens could be punished. “If the U.S. (a quarter of world GDP) and the EU (another quarter of world GDP) want this to happen, then this can happen. Again, this is political, not technical.”
Political currents are flowing Piketty’s way. With the approach of the 2015 deadline for accomplishment of the United Nations’ Millennium Development Goals, such as halving extreme poverty and reducing child mortality, some activists are pressing for a post-2015 agenda that shifts the focus from reducing poverty to reducing inequality. “As inequalities widen, the social fabric of our societies is both stretched and strained,” UN Secretary General Ban Ki-moon proclaimed in February on the World Day of Social Justice. Without taking a position on the post-2015 agenda, he added, “There is nothing inevitable about inequality.”
A little inequality promotes growth by encouraging people to work hard and advance themselves, but the world has an embarrassment of riches on that score. The poor are demotivated while energetic entrepreneurs are becoming complacent rentiers who live off their wealth, Piketty says. “Money tends to reproduce itself,” he writes. “The past devours the future.”
Is there an undercurrent of envy in the campaign against extremes of wealth? No doubt, and that’s unfortunate. The correct case for a global tax on capital is positive, not negative. It’s about rejuvenation.