Thomas Piketty ignores government capital


Thomas Piketty’s core argument in Capital in the Twenty-First Century is that the return on capital is (likely to be) greater than GDP growth and therefore those with capital will gain an ever greater share of wealth increasing inequality. This is not true in an individual sense or societally. Gilts returning 4% over an 80 year lifetime, paying 45% income tax, assuming RPI of ~3% and inheritance tax on two transfers would reduce a £100m fortune by 92% in real terms. There are almost no historic fortunes. Crassus was supposedly the wealthiest man to ever live. The de Medici fortune, assuming a zero real return, would be worth about $23bn today. But in practice individual great fortunes have struggled to earn even a zero real return, even without destruction, let alone Piketty's assumed 5% real return, which would have seen them dwarf Bill Gates' paltry billions.

Piketty argues income is increasingly taken by the productive: As he shows on page 200 of his book capital’s share of national income has fallen about 40% from 1850 to 2010 despite a substantial real savings ratio. Piketty argues the productive avoid taxes making inequality greater. According to the ONS the top 10% of income earners pay 39 times more income tax than the average of the other 90%.

Redistribution is materially greater than increased taxes and capital’s falling share of income would suggest. Capital and the entrepreneur have created almost all of the growth in income. The hairdresser has not changed his productivity but has seen his real income grow. The farm workers who produce vastly more than 200 years ago, only do so because of the inventions and innovations of capitalists and entrepreneurs. While he drives a combine harvester he has not improved his skills, capitalists and entrepreneurs taught him how to use their inventions and better processes. Workers work ever fewer less strenuous hours, retiring earlier and nevertheless receive an ever increasing real income.

Piketty argues that the private capital to income ratio has grown materially to about 6, that its distribution is very skewed and government’s capital is zero, all as evidence of the inexorability of ever greater inequality. However, government has vast wealth in the form of the net present value of the tax flows they receive (and expect to receive in the future) to which he ascribes no value. But these flows are worth about 40x national income.

Even if he is correct about private wealth, the overall wealth of society is quite evenly distributed—the government’s 40 is increasingly devoted to welfare (and might usefully be imagined as de facto belonging to those who expect to receive it in the form of welfare and state provision of goods), redistributing from those who earned it to the rest of society. The capital value of transfers to a hypothetical individual who chooses to never work and relies entirely on the state is likely to be in the region of £1.5m.