Piketty’s ever-increasing inequality is just another economic forecast
Furore around French economist’s infamous book entrenches opinions on both sides
We love foreign capitalists but are hostile to Irish ones. Thomas Piketty would feel even more at home here than in France.
The furore unleashed by Thomas Piketty’s now infamous book has had at least one disappointing aspect: notwithstanding the mountains of data provided by the eminent professor, not a single mind has been changed as a result of his scholarship.
Moreover, when errors and irregularities were (inevitably) discovered by the Financial Times, the two sides of the debate lined up immediately with extremist conclusions: either Piketty should be wholly dismissed or the FT’s data must be politically motivated and, therefore, completely wrong.
In a spectacular display of partisan writing, Paul Krugman has come close to arguing that any data that casts doubt on Piketty’s conclusions should be wholly disregarded. Krugman is careful not to canonise Piketty but he comes pretty close. All of which stands in stark contrast to the way in which Professor Krugman jumped all over the infamous conclusions of Reinhardt and Rogoff (that growing public sector debt over certain thresholds causes problems) when relatively minor errors were spotted in their spreadsheets.
Krugman has surprised me with his almost reckless method of arguing: for example, he states, in this newspaper today,”taxes and benefits don’t greatly change the picture” and then, in the same sentence, argues exactly the opposite: “since the 1970s big tax cuts at the top have caused after-tax inequality to rise faster than inequality before taxes”. What he means, of course, is that in the US, taxation policy has had big effects, but the not the ones he would have liked.
Taxation and benefit changes have had a large impact on inequality, in both directions, in many countries.
In Ireland we already have one of the most redistributive regimes in the world, at least according to an IMF study. The key takeaway from Piketty’s work is that capital taxation should be increased; in particular he advocates a global wealth tax. The main problem with all of this is that Piketty’s conclusions don’t automatically flow from his data. In particular, his belief in ever increasing inequality is just another economic forecast and should be treated with the contempt that all such prognostications deserve.
Changes in wealth inequality can come about in a number of ways. It is likely, for example, that the property price surge in places like London, New York, Hong Kong and Ballsbridge has acted to widen wealth disparities around the world. Piketty’s data may, in part, be driven by this property effect. It is not clear why we should be concerned about this, at least from a taxation perspective. If this is a problem requiring a solution it should surely involve building more homes where people have expressed a desire to live.
Domestically, the calls for wealth taxes have an air of unreality about them, since Ireland has already introduced wealth taxes of various kinds. The only debate, therefore, is the rates at which these capital taxes should be levied, not, given that they exist already, whether they should be brought into being. It is interesting that no Irish political party currently thinks the abolition of wealth taxes in Ireland is a principle worth campaigning for. Here, the debate is already over.
In Ireland, we don’t have very good data about the distribution of wealth. So analysts have sometimes drawn inferences from distributions elsewhere, where the data is better. What we think we know is that wealth is concentrated in a small part of the population. Broadly, there are three pots of wealth of a size worth taxing: property, financial assets and bank deposits. We already tax property and the bulk of financial assets (via the pensions levy). The only thing left wholly untaxed, for now, is your bank deposit. So when we hear calls for of a ‘new’ wealth tax we must assume that they are going after our bank deposits. Yes, there will be allowances and thresholds but the principle is clear: there is only one source of wealth currently untaxed.
Vincent Browne recently asked, quite reasonably, ‘why are we so keen to welcome foreign capital to Ireland, why can’t we grow our own businesses?’ John Moran, outgoing boss of the Department of Finance, recently asked the same question, albeit in a different context. One part of the answer to this lies with the taxation system: we tax capital heavily via capital gains taxes, capital transfer taxes, one of the most onerous inheritance tax regimes in the world and various wealth taxes. We tax entrepreneurs at a marginal rate of 55 per cent - and, if they are successful capitalists, at an average taxation rate that exceeds 50 per cent pretty quickly. A good rule of thumb is the more you tax something the less of it there will be. It should be fairly obvious why there aren’t many home-grown capitalists in Ireland. We love foreign capitalists but are hostile to Irish ones. Thomas Piketty would feel even more at home here than in France.