What should we do if Piketty is right?


The biggest non-fiction book release of 2014 was surely Thomas Piketty's Capital in the 21st Century which managed to inspire a frenzy of response from academics, the intelligentsia, and even huge sales. I hope I can fairly reduce his argument to the claim that wealth inequality will widen if the return on capital (r) is higher than the growth rate (g). Recently Matt Rognlie has presented it with what many have seen as a very serious response (pdf) based on the point that more or less the entirety of the widening in the wealth gap since the 1970s has been down to rising land values, themselves based on restrictive planning policies rather than a fundamental mechanism to do with r and g.

Without having got more than 10% through Piketty's book, I'm hardly in a place to weigh up these perspectives, but I was very interested by a new paper from Clemens Fuest, Andreas Peichl and Daniel Waldenström, whose work on corporation tax I already knew well.

Entitled "Piketty's rg model: wealth inequality and tax policy" (pdf) it finds some evidence for his model being true, then asks 'if it is true, what shall we do?' Well it turns out that we should pretty much follow the ASI's budget wishlist policies!

Increasing the taxation of mobile capital is only possible on a global scale, as suggested by Piketty (2014). Experience with policy coordination in this area suggests that this will not be possible. It therefore seems more promising to try to increase rather than to decrease r through tax policy.

Some evidence suggests that recurrent taxes on immovable property and consumption taxes (and other property taxes) are the least distortive tax instrument in terms of reducing long-run GDP per capita. Increasing these taxes and using the additional revenue to reduce labour taxes, for instance, would probably stimulate growth and have positive effects on the income distribution.

Tax consumption, tax (the consumption of) land values, reduce distortionary taxes on labour (and, we might add, capital and transactions). If Piketty has as much influence on the Left as it looked like he might then maybe the world's tax systems are in for some major boosts to efficiency!