Will 80% Income Taxes and a New 10% Wealth Tax Fix Our Economy?

piketty talking cc

The economist offering this “solution” has been feted by the Obama White House economic staff, the International Monetary Fund, and by many of the people running world economies today. His ideas are definitely “in play.”

Thomas Piketty, the forty-two year old French economist whose book, Capital in the Twenty-first Century, became an overnight sensation and unexpected bestseller, is being hailed as the new Keynes, an economic thinker who can lead us out of our current economic malaise, just as Keynes is alleged by his followers to have lead us out of the Great Depression.

Keynes’s keynote book, The General Theory, is loaded with economic theory. There are only two pages of data in that book, and Keynes dismisses the scant data he cites as “improbable.” By contrast, Piketty’s new book, Capital in the Twenty-first Century, is stuffed with data. Indeed Piketty considers himself a successor to the economist whose data Keynes dismissed, Simon Kuznets. Almost everyone admits that Piketty’s theoretical case is weak — but, his supporters say, look at all this data. You can’t argue with this mass of historical evidence!

Let’s take a closer look. Piketty’s primary argument is that wealth (which tends to be concentrated in few hands) grows faster than the economy, so that those with a lot of wealth keep getting richer relative to everyone else. This is supposed to be an inescapable feature of capitalism. (If this sounds familiar, it should be. It echoes both Marx and Keynes, although we should remember that Keynes mocked most of what Marx said as “hocus-pocus.”)

So what then is the evidence that wealth has grown faster than the economy?

We’ll start with the chart below, adapted from Piketty’s book. The top line is return on capital and the bottom line is the economic growth rate. The top line is supposed to be how the rich are faring and the bottom line how the average person is faring. Note that the lines on the far right are just a projection of Piketty’s, and not actual history.

Piketty 1

This chart is astonishing for many reasons. First of all, it suggests that capital earned a 4.5 percent or higher return for the years 0-1800 C.E. This is a crazy number. If the human race had started out with only $10 in year 1 and compounded it at 4.5 percent a year for any series of 1,800 years, by now we would have much, much more than a trillion times the entire world’s wealth today, which is estimated at $241 trillion by Credit Suisse.

The 4.5 percent or higher number is also crazy because Piketty is right that there was negligible economic growth prior to the industrial revolution, and such high returns for the rich are just not consistent with so little growth. The truth is that rich people for most of those years were interested in spending or hiding their wealth, not in investing it, because wealth out in the open was likely to be stolen, if not by bandits, then by government.

If you look closely at the more modern part of the chart and ignore the projection into an unknown future, you will see that the lines do not support Piketty’s thesis. His idea that the rich will always necessarily get richer relative to everyone else under capitalism is not supported by the data he presents.

The next chart shows the share of wealth of the 10 percent richest in Europe over time (dark-blue, top line), the share of wealth of the 10 percent richest Americans (the light-green, second line from top), the share of wealth of the top 1 percent Europeans (the light-blue, third line from top), and the share of wealth of the top 1 percent Americans (the dark-green, fourth line from top). This chart doesn’t support Piketty’s thesis either. Yes the share of the rich has grown since 1970, but only after falling previously.

Piketty 2

The next chart is one that I have commented on in an earlier article. It shows the income of the top 10 percent in the US over time as a percent of all income. Income in this case includes capital gains which arguably are not true income, but rather the exchange of one asset for another, and excludes government transfer payments which make a considerable difference to the results. Even so, once again we do not see an inexorable rise in the income of higher earners over time, far from it.

Piketty 3

What we actually see is two peaks for high earners, right before the crash of 1929 and again before the crash of 2008. These are the two great bubble eras in which government printed too much new money, which led to a false and unsustainable prosperity. These were also crony capitalist eras, as rich people with government connections used the new money to become even richer or benefited from other government favors.

Unfortunately world central banks have blown up yet another bubble in capital markets following the crash of 2008, which has again brought the high earners share back to 50 percent in 2012, based on data that became available after the book’s publication. This newest bubble too will eventually burst and bring the share back toward the 40 percent level of 1910, the start of the chart.

Perhaps the most astonishing claim in Piketty’s book is that government bureaucracies need to be reformed so that they can make most efficient use of all the new income and wealth taxes that are recommended. The assumption is that almost complete government control of the economy would be best, but that the machinery needs some fine tuning.

Economist Ludwig von Mises demonstrated almost 100 years ago that a state managed economy will simply not work, because among other problems it cannot set workable prices. Only a consumer run economy can do that. Socialists have been trying to disprove Mises’s thesis ever since, but have never succeeded. Piketty should at least read Mises.

A state managed economy is also unable to save and invest, especially invest with intelligence. This is crucial, because it is quality, not quantity of investment that matters most for job creation.

Piketty says that taxing away the savings of private individuals is a better choice than alternative ways of controlling inequality such as communism, protectionism, or capital controls. But none of these approaches will control inequality; they will just create poverty for everyone, rich and poor alike, without ending inequality.

A significant wealth tax would be self-defeating from the start. It would destroy the stock, bond, and real estate markets. With many sellers and few buyers, wealth would simply evaporate.

158 comments
ThomasMrak
ThomasMrak

Government action has created much of the "inequality". Amazing how incredibly stupid and close-minded academics can be.

James T. Wood
James T. Wood

It will turn back the previous decades of wealth misapplication!

Jerry Davis
Jerry Davis

Stop all federal with holding from paychecks and start taxing the rich and wealthy. Theres an idea! Income tax was supposed to be a temporary tax anyway.Boy did they run with that one!

Geoff Jung
Geoff Jung

A per capita tax is much more fair than a flat tax. I figure $50 / week would support a $1 trillion annual federal budget (in the USA).

Stephen Perkins
Stephen Perkins

I think that the top rate when Ike was President was 90%. I was alive then and things were a hell of a lot better. Of course, we had a Republic back then.

John Odermatt
John Odermatt

Anyone who holds a microphone like that should not be trusted

David Normandin
David Normandin

A Flat tax is regressive. The low income crowd will pay taxes on 100% of their income while those making enough to save and invest will get a free ride.

David Normandin
David Normandin

Flat tax is regressive. The low income crowd will pay taxes on 100% of their income while those making enough to save and invest will get a free ride.

Larry Henry
Larry Henry

no. go back to the gold standard and it will stabilize the dollar and the country

Stephen Perkins
Stephen Perkins

Tax the rich. It is time that the free ride ended. They make their money and spirit it to the Caymans. Tax them like Ike taxed them. Things were much better then. To paraphrase Ronald Reagan, 'Are you better off now?"

Demetri Markou
Demetri Markou

Why taxes.. To pay who... The people who own the country.. Read what I posted..

Greg Heckaman
Greg Heckaman

it may be the only thing that would save this country

Scott Taylor
Scott Taylor

no, they will manage to piss off that as well.

Joseph Miller
Joseph Miller

Cut corporate subsidies, especially oil and biotech.

Linda Zeitoune
Linda Zeitoune

how about decreasing welfare by 50%...no money to illegals or foreign countries and all wh employees and upper staff take a 50% cut!

John Jones
John Jones

History yes History( that which you can go back and see ) says YES

Steve Combs
Steve Combs

Only an imbecile would be in favor of an 80 % income tax; o yeah, and the bums that don't work.

Joseph C. Marcure
Joseph C. Marcure

This was tried before, 98% tax in England ,Was the reason the Beatles came to America, so they could actually get, some of what they earned...when a Gov"t starts thinking it entitled to this much, its time for its masters(us), to tear it down and start a new Gov"t, There is no end to the appetite of Socialism for YOUR income and It ALWAYS fails..

OldMexicanblog
OldMexicanblog

--- This chart is astonishing for many reasons. First of all, it suggests that capital earned a 4.5 percent or higher return for the years 0-1800 C.E. This is a crazy number. --- 


Indeed, it looks totally made-up. You can't have such return on investment if there's no invested production to begin with, yet Piketty indicates the world was growing at almost zero to 1% for 1.8 thousands years?



--- If the human race had started out with only $10 in year 1 and compounded it at 4.5 percent a year for any series of 1,800 years, by now we would have much, much more than a trillion times the entire world’s wealth today, which is estimated at $241 trillion by Credit Suisse. ---


That should tell you right there that Piketty is a charlatan. He provides all that data to impress the easily-impressed and the economically-ignorant.

Ron Holliday
Ron Holliday

I'll shoot anyone trying to steal more of my income

Jay Kay
Jay Kay

It's worthless paper it's about stealing their assets for nothing!!!!! Oil, minerals, food!!!!!

Benjamin Stockton
Benjamin Stockton

T.D., common people don't have the money to "create jobs" anymore. That is the exclusive privilege of the rich. The rich being the only people Libertarians think matter.

Barbara Mealer
Barbara Mealer

This essentially says it all...if they proceed with this it will be total socialism and the rich will still be rich and everyone else will be poor. as Mises showed...government control of the economy DOES NOT WORK...EVER and they have proven that over and over again...it you tax the rich at 80% they will take their wealth and leave which is what is happening in France already...and the dems want to put this into action...they are really some kind of stupid.

Barbara Mealer
Barbara Mealer

Perhaps the most astonishing claim in Piketty’s book is that government bureaucracies need to be reformed so that they can make most efficient use of all the new income and wealth taxes that are recommended. The assumption is that almost complete government control of the economy would be best, but that the machinery needs some fine tuning. Economist Ludwig von Mises demonstrated almost 100 years ago that a state managed economy will simply not work, because among other problems it cannot set workable prices. Only a consumer run economy can do that. Socialists have been trying to disprove Mises’s thesis ever since, but have never succeeded. Piketty should at least read Mises. A state managed economy is also unable to save and invest, especially invest with intelligence. This is crucial, because it is quality, not quantity of investment that matters most for job creation. Piketty says that taxing away the savings of private individuals is a better choice than alternative ways of controlling inequality such as communism, protectionism, or capital controls. But none of these approaches will control inequality; they will just create poverty for everyone, rich and poor alike, without ending inequality. A significant wealth tax would be self-defeating from the start. It would destroy the stock, bond, and real estate markets. With many sellers and few buyers, wealth would simply evaporate.

Delmer Bowman
Delmer Bowman

No stop spending so much and quit borrowing money to send to countries that hate us

Ken Marcewicz
Ken Marcewicz

No ! Money can't fix it ! It's the leadership !

John Kollander
John Kollander

why are we giving money to exxon mobile with the profits they make

John Kollander
John Kollander

flat tax sound like the fairest deal that's why it will never be the rich want the free ride

Kelly Jay
Kelly Jay

Wow, a noted economist blowing your libertarian fantasies out of the water really has you guys all upset!

Ronald Richardson
Ronald Richardson

NO,QUIT GIVING MONEY AWAY. TO COUNTRIES THAT DON'T LIKE THE USA!!!!!

Valerie Ploch
Valerie Ploch

Nope, it just means Congressmen/women and the administration will redistribute/steal more money for themselves and advance their effort to finish the total destruction of this country's economy!

Lj Freeman
Lj Freeman

No. Getting rid of liberals is the only way to fix the economy. Liberalism is a mental disorder. Pass the word.

Sandy Hood
Sandy Hood

A progressive flat tax with no exemptions sounds reasonable to me ...Historically we've paid much higher taxes than we do now!