Review: ‘The Economics of Inequality,’ by Thomas Piketty

http://www.nytimes.com/2015/08/03/books/review-the-economics-of-inequality-by-thomas-piketty.html?hp&action=click&pgtype=Homepage&module=mini-moth&region=top-stories-below&WT.nav=top-stories-below

by drallison • 11 years ago

36 59 11 years ago

nytimes.com

Gustomaximus3• 11 years ago

For societal equality 2 things I feel are really important are;

1) Death taxes. This limits dynastic wealth if a decent % is being taken back every generation. And it creates a desire to make opportunity for the next generation as it's not so easy to buy this directly. Assuming there is a minimum threshold so people don't lose their family home this should be looked at quite positively. You can see it as deferred taxation obligations. Given the government needs a certain amount, I'd much prefer to pay less tax while living if I can delay contributions til death.

2) Keeping necessities in life equal access. As soon as the elite can segregate them-self from public systems like schools and hospitals the desire to fund and ensure top service levels across these for the masses goes down. If people making the funding decisions have to use the same schools, hospitals, pensions, roads etc as the rest of the masses they will ensure these are funded and functioning well.

intrasight• 11 years ago

Which is why many suggest that congress should only get health care through medicare.

applecore• 11 years ago

Does one need an estate tax if there's either a tax on wealth or a land value tax?

bsbechtel2• 11 years ago

Keep in mind any tax on non-liquid assets that don't generate a lot of free cash flow can be very burdensome to those who control those assets. I believe this is why some states have moved away from death taxes....family farms were being sold off to pay taxes from the previous generation.

NoMoreNicksLeft• 11 years ago

Assuming there is a minimum threshold so people don't lose their family home t

There is no minimum that satisfies both. What's a house cost in San Francisco or LA now anyway?

If we set it too low, people lose family homes/farms, if we set it too high the rabble-rousers bitch. There's no value that works.

Keeping necessities in life equal access. As soon as the elite can segregate them-self from public systems like schools

I'm not sacrificing my children to the public school system. Sorry.

crdoconnor2• 11 years ago

If we set it too low, people lose family homes/farms, if we set it too high the rabble-rousers bitch. There's no value that works.

People losing their family homes and farms is what should happen in a meritocratic society. Intergenerational wealth transfer is by its very nature antithetical to meritocracy.

The irony is that for many people laboring under a very unmeritocratic society, its the one sliver of wealth which keeps them afloat. Ergo they can be relied upon to support it.

hackuser9• 11 years ago

Sorry to see you voted down. Though I disagree, I think these are good points.

If we set it too low, people lose family homes/farms, if we set it too high the rabble-rousers bitch. There's no value that works.

This is true of any issue; there always are people who disagree and yet somehow, through the democratic political process, we've been passing laws and establishing policy for 239 years. Politics sucks, but it works. Even Iran and the U.S. can find agreement.

I'm not sacrificing my children to the public school system. Sorry.

I think this is perfectly valid and responsible. It's not your kids fault, and they'll be better prepared to contribute to the community with a better education.

But if you don't support the public schools otherwise (e.g., through taxes and political support), you are sacrificing your kids. They will live in a world filled with many more uneducated, unskilled people. These people will vote, will be your kids co-workers (or employees or talent pool), will be your kids' customers, etc. And your kids will lose the benefits of all the brilliant things that could have been done with all that wasted talent.

FlannelPancake2• 11 years ago

As soon as the elite can segregate them-self from public systems like schools and hospitals

Ehh, I mostly agree with your first point but I think it's kind of a pipe dream to think it could be otherwise. Go visit a public school in a place like Greenwich, CT and then go visit a public school in the Bronx. Both technically public schools, but students have a clear advantage in one vs the other.

Sure, Bill Gates's kids aren't going to public school probably even in Greenwich. Still, let's not pretend that the elite only go to private schools, or that they wouldn't congregate in wealthy areas to make public schools essentially private.

Inequalities will always exist as long as people can use their assets to gain advantages for themselves/their families, and trying to force it otherwise against an unwilling populace is likely to just exacerbate the problem in other ways (see: Suburban flight).

michaelchisari• 11 years ago

Both technically public schools, but students have a clear advantage in one vs the other.

Funding schools through property taxes is an easy explanation for that one. There are other factors, of course, but are there any other industrialized nations where public funding of education is directly tied to parental wealth?

yummyfajitas4• 11 years ago

The problem with (1) is that a large amount of inheritance taxes are taxes on illiquid assets. So if you inherit a $10M business, the only way to pay your tax bill is to liquidate the business. Needless to say, it's bad for society if a business is shut down simply due to the death of a founder.

The way to resolve (1) is if the IRS allows you to pay taxes on in-kind receipts with in-kind payments. I.e., if you get a business that the IRS claims is worth $10M, and you owe $3M in taxes on it, you can pay your tax bill by handing the IRS $3M worth of shares.

(This would also fix a major problem that startup employees have, namely that if they quit their job, they need to exercise options and incur a huge tax bill. But they can't actually sell the shares to get money to pay the taxes. Not a problem if they can give the IRS some of their shares.)

obrero2• 11 years ago

inheritance taxes are taxes on illiquid assets

This is why estate planning exists. Any business that actually plans for estate taxes will not have this problem at all.

jivardo_nucci4• 11 years ago

"So if you inherit a $10M business, the only way to pay > your tax bill is to liquidate the business..."

False.

Any business in good financial condition can obtain loans easily, especially in the current economy.

And why would the need to "liquidate the business" be bad? The seller still gets the value of the business plus the flexibility of investing that value forward.

hackuser9• 11 years ago

This is a myth, perpetrated by the campaign against the estate tax. See my other comment:

https://news.ycombinator.com/item?id=9993417

if you inherit a $10M business, the only way to pay your tax bill is to liquidate the business.

I've never heard of a business being liquidated to pay estate taxes, and I've heard of many businesses being passed from generation to generation. For one thing, doesn't this valuable business have revenues?

obrero2• 11 years ago

As soon as the elite can segregate them-self from public systems like schools and hospitals

And military front lines. The US has had a system to allow the children of the rich to avoid the military during wars since World War II - the student 2-S draft deferment to the end of conscription altogether in the early 1970s. This goes back in US history - the US Civil War is where the phrase "rich man's war, poor man's fight" comes from.

wtbob3• 11 years ago

This goes back in US history - the US Civil War is where the phrase "rich man's war, poor man's fight" comes from.

Rich Yankees, yes: a rich Northerner would pay a poor man to take his place in the draft. A rich Southerner would outfit his own regiment and lead it in defense of his home.

hackuser9• 11 years ago

Interestingly, "death tax" was a term of propoganda created for the organized campaign against the estate tax.

The story is told in the article below; it's worth a few bucks. It will change how you look at politics forever. Probably, like almost all Americans, you have no idea how carefully planned many of the political arguments everyone repeats [EDIT: as everyday conversation] are, and by just a few people:

http://www.psqonline.org/article.cfm?IDArticle=19132

Gustomaximus3• 11 years ago

Maybe to my point we should rebrand it as 'deferred tax obligations'.

Could even even give people the option to pay (for easy example) 2% estate tax yearly while alive or 30% at death type deal. I bet most would happily take the 'deferred tax' option.

jivardo_nucci4• 11 years ago

Surely you could provide a reference not behind a paywall?

IkmoIkmo2• 11 years ago

On 1) there's been a ton of research on intergenerational social mobility, and it plays such a gigantic role that inheritance of capital has become inheritance of socioeconomic status and all that it entails.

And it's becoming a bit insane. Anyway it's not a death tax and I think it makes sense not to use the term too much. You die, your don't get taxed, you're dead. If you had no heirs, there'd be no taxation to be done because well hey you're dead. The taxation comes from inheritance. Calling it a death tax feels like screwing over old, vulnerable and well, dead people. But inheritance of even $100 is this money you never worked for, that you somehow deserve to have because someone related by blood just died. And if it's $100k I don't care much. But above that, it's insane to just get all this money you never worked for. I mean we don't do that for anything else, do we? We don't say 'oh your father was from a powerful family, he just died so here's 1 ticket to the best private school, 1 ticket to have people build you a house, 1 ticket to have doctors treat you for the rest of your life for free, 1 ticket to get all these fancy jobs' etc. It'd be pure nepotism. Yet when instead of a ticket, it's a bag of a ridiculous amount of money (say a few million), that can buy the equivalent of all those tickets, it's completely fine. And talking about a tax on that, so that if you inherit $100k you keep it all, but if you inherit $2m you only keep $500k (yeah, pretty aggressive), makes total sense to me. I mean that $500k is still a mind boggling advantage over those without it, you're basically carefree and set up until you're past 30 without any financial issues and any education you want, and the ability to take measured risks.

I guess to some extent it's a self-reproducing issue. In an unequal society, if I had $10m, I'd want my kid to have it. In an equal society, I'd want my kid to have $50k and do his very best. Like here in the Netherlands I couldn't care less if my kid didn't inherit a whole bunch of money, university is essentially free, as is healthcare, subsidies exist for housing, if you work hard and have parents to guide you, money isn't a top factor (although it plays a role, always). But in the states I'd be really concerned for my kids as a poor parent, and if I happened to be rich and about to die, I'd really want to leave them wealth because it plays such a big role in social mobility.

wtbob3• 11 years ago

But above that, it's insane to just get all this money you never worked for.

It's the person who worked hard for it who's giving it to his heirs. It's not money falling from the sky.

Frozenlock• 11 years ago

About inheritance taxes: https://www.youtube.com/watch?v=bJwUaVDIPXg

shahryc2• 11 years ago

Although I understand your argument, I don’t think” 1) death taxes “ or 2) “Keeping necessities in life equal access” actually help maintain societal equality

re: death taxes, Tyler Cowen writes in the WSJ, “ It isn't clear that the estate tax raises much, if any, revenue. The very rich engage in tax-avoidance strategies. The apparent revenue raised is often offset by a lower intake from income and capital gains taxes. Furthermore, it has been estimated that the costs of implementing tax-avoidance strategies are roughly equal to the (gross) revenue raise.” But, even if this premise is not true (that there’d a positive net difference in the revenue raised), that’s assuming that the rich will maintain the same level of spending before they die, which may not be the case if they will get taxed on it when they die. In other words, the rich would have a greater incentive to spend it while they are alive, which merely increases consumption inequality.

re: Keeping necessities in life equal access. I agree on that point. But, I think it’s very difficult to achieve because of the complex factors that differentiate people in society. For example, in a given National Blue Ribbon School, there’s mix of people from different socioeconomic backgrounds that theoretically have equal access to educational resources the school provides. But, in practice, the educational resources that the school does not provide (at-home support, extended social networks, etc.) will be heavily correlated with a higher socioeconomic background.

hackuser9• 11 years ago

Tyler Cowen writes in the WSJ, “ It isn't clear that the estate tax raises much, if any, revenue. The very rich engage in tax-avoidance strategies. The apparent revenue raised is often offset by a lower intake from income and capital gains taxes. Furthermore, it has been estimated that the costs of implementing tax-avoidance strategies are roughly equal to the (gross) revenue raise.”

Cowen is merely repeating the talking points of the propaganda campaign against the estate tax planned in the mid-90s:

  Yet in order to win over a specific audience to the issue,
  conservative discourse began to shift toward another frame,[1]
  as can be seen in important reports on the estate tax written by
  conservative analyst Bill Beach. Beach had been specifically
  brought to the Heritage Foundation, a prominent conservative
  think tank, thanks to funds raised by Alabama estate planner
  Harold Apolinsky, who formed the American Family Business
  Institute (AFBI) in 1992 to lobby against the estate tax. ...

  In a 1996 backgrounder ... [Beach] offered three main
  arguments for repeal: the estate tax is a diminishing source of
  revenue; it fails to achieve its purported goals of wealth
  redistribution; and the tax does more harm than good in lost
  productivity, lost jobs, and decreased revenue through other
  taxation.[2]

As I mentioned elsewhere in this thread, Beach was also the source of the myth that small businesses and family farms were suffering from the tax, and the same campaign carefully developed the term 'death tax', which they credit with much of their success. Also, as mentioned elsewhere, the cited article will change forever how you read political commentary on any issue, as you realize that much of it, including by unwitting lay people, is parroting propaganda developed by special interests.

... even if this premise is not true (that there’d a positive net difference in the revenue raised), that’s assuming that the rich will maintain the same level of spending before they die, which may not be the case if they will get taxed on it when they die.

This seems very speculative. I've heard so many arguments with a similar argument: 'don't tax the wealthy or they will do X'. For example, the Reagan administration and others at the time argued that reducing taxes on the wealthy would increase their productive use of the funds, causing wealth to 'trickle down' to everyone else. As it turned out, cutting taxes on the wealthy (and thereby relatively increasing the burden on everyone else) made the wealthy wealthier (surprise!), and everyone else's income has been stagnent since then. The wealthy need to do their fair share and make the same sacrifice as everyone else; they are not a special case.

----

[1] "frame", as in a way to 'frame' an issue or debate

[2] "Death and Taxes: Issue Framing and Conservative Coalition Maintenance" by Richard Meagher: https://www.psqonline.org/article.cfm?IDArticle=19132

charlescearl• 11 years ago

http://piketty.pse.ens.fr/en/publications#AR1PUBENG

dataker• 11 years ago

A major problem while discussing inequality is that many lose objectivity and start blaming X/Y party.

Whether right or left, I can think of a dozen issues both could work on: end lobbying; lower taxes for, at least, the middle class; ending/avoiding malicious international trade deals; end bureaucratic BS,...

afarrell• 11 years ago

end lobbying

The problem here is the first amendment. It explicitly protects the right to assemble and petition the government for a redress of grievances.

jazzyk• 11 years ago

There is a difference between petitioning and bribing. Oops, excuse me, I meant to say "donating to the campaign".

Or paying $300K to hear them speak for 30 mins:

http://www.zerohedge.com/news/2015-08-03/everyday-americans-...

2anon4this1• 11 years ago

These economists love aggrandizing each other by referring to each other's work as "magnum opuses" and "tour de force", similar to handing out their faux nobel prize annually to the trendy economist of the moment. It is all part of their attempt to try to legitimise their vague beliefs as science.

elchief• 11 years ago

Magna Opera and Tours de Force /pedantry

Yes, though, much aggrandizing in academia

fsloth2• 11 years ago

I suppose agreeing on terminology and collecting past historical data are crucial steps in developing a science. Historically collecting good data in economics has been painstakingly slow, especially in large scales. Maybe the field will move forward soon towards better explanations.

I have no problem with the fact that human understanding is incomplete. What bugs me is that economic models of questionable utility are taken as gospel in politics and used as a battering ram - "because science told us to".

ghufran_syed2• 11 years ago

I would argue that the difference in lifestyle and wellbeing between the poorer citizens of North Korea vs South Korea / East Germany vs West Germany during their respective histories should at least raise the question of whether reducing inequality by taking more money from the rich, might have adverse consequences for both rich and poor citizens..? Paul Graham's essay on the subject is worth reading +/- refuting if you feel strongly about the topic: http://paulgraham.com/inequality.html

maxxxxx• 11 years ago

This makes no sense. North Korea and East Germany didn't do well because they stifled private enterprise. It has nothing to do with taking from the rich. Sweden has high tax rates and does perfectly fine.

ghufran_syed2• 11 years ago

So you accept that stifling private enterprise is economically harmful to an economy? How and why did they stifle free enterprise?

If 'free enterprise' has two potential outcomes, 1) 'lose money' (high probability) or 2) 'make lots of money (which then gets taken by the government) leaving you a little bit of money' (low probability)

wouldn't that also be 'stifling' to private enterprise? And therefore harmful to an economy?

Regarding Sweden, it makes more sense to compare things with their natural control groups if available. If you compare North Korea to South Korea, or East Germany to West Germany, you remove a lot of the cultural, geographic and other potentially confounding factors, so the differences in outcome between those pairs are more likely to be related to the policy differences.

clavalle• 11 years ago

I'd be interested in an game-theory, microeconomic treatment of decision making differences between people in different economic situations. If they study went one step further and showed how those micro decisions aggregated into macro inequality, that would be interesting to me as well.

Please, if someone knows of some research along these lines I'd love to dive in. I've done a bit of searching and it seems that most economists focus on the already somewhat wealthy individuals or entities when it comes to real life somewhat messy decision making or the poor only in aggregate.

jivardo_nucci4• 11 years ago

The simulation studies of Bouchard & Mezard show that, regardless of initial conditions, wealth distribution ends up a Pareto distribution with a small percentage taking almost all of the goods. The take-away of Bouchard & Mezard's studies: the very rich aren't rich because they earned it (i.e., because they are skillful or knowledgeable), they are rich mostly because they are lucky.

All my life I've assumed that, when people had a going concern or were rich, that they _earned_ their wealth. But Bouchard & Mezard says they're, for the most part, simply very lucky.

If luck, rather than skill, is the source of one's wealth, then has one "earned" that wealth? How can one lay exclusive claim to something given by chance? I would contend that no such claim can be made.

In particular, I would contend that income gained through luck is fair game for government acquisition through taxation, and if it is possible to distinguish that portion of wealth due to skill from that due to luck (and such appears possible), then the "lucky" portion is open game for acquisition to be spent or redistributed as decided by the powers-that-be.

Wealth Condensation: Why the Rich Get Richer (and the poor poorer): http://iwillknow.jesaurai.net/?p=387

The Mathematics of Inequality: https://www.austms.org.au/Jobs/Library4.html

FWIW Bouchard & Mezard are not the only researchers whose models say this:

Chance helps the rich get richer, simulation study finds: http://www.world-science.net/othernews/110722_chance.htm

fsloth2• 11 years ago

This result is really important when considering 'fairness' in taxation as well as when considering the ethics of tax evasion.

If financial aggregation is a feature of the system then it seems like tax evasion is not just someone taking 'their share' of the money which they earned somewhere else but it's closer to actually stealing from everybody.

Also, I think there are implications for the ethics of a global economy where communal services are financed from a local tax base and the profits leak to an entity beyond the taxation of the region.

hackuser9• 11 years ago

I'd go even further:

First, consider the distribution of wealth based on consequences of birth, which is pure luck: Race, gender, socioeconomic class of parents, parental 'skill' (care, skill development, investment in your upbringing, etc.), and location (e.g. Silicon Valley, rural North Dakota, or North Korea?). Where and to whom you were born is highly determinative of economic success, but clearly it is 100% luck and not skill.

Also consider how much of success is due to others. Consider Walmart, for a simple example. How much of the following did Sam Walton build himself?:

* Infrastructure: Roads, train tracks, airports, etc. for transporting the goods he sells

* The technology of that infrastructure: Who invented and developed automobiles, trains, airplanes, refrigeration, electric lighting (so logistics can operate at night), conveyor belts, electrical generation and distribution, IT, etc.

* The development of the human resources: The education that makes his workers literate and skilled to do their jobs: The schools, the teachers, the concepts, the textbooks, pencils, chalkboards ... we could even say language, mathematics, etc.

* The system of laws and government that protect his business and allow it to operate efficiently (e.g., via contracts, dispute resolution, etc.).

That's just a small sample of what Walmart depends on, that Sam Walton did nothing to provide. Sam Walton, and many others, built something very impressive and far more than probably anyone reading this, but it amounts to a sliver on top of a massive infrastructure built up by generations before him. He, like the rest of us, needs to contribute his share and build for the next generation, just like all who came before him.

jivardo_nucci4• 11 years ago

1. Concerning your first argument (consequences of birth):

Since the results of the process (birth and rearing) cannot, in a free society, be taken away from an individual and used to benefit others, then what might you propose as a socially acceptable solution? Perhaps a "white man's tax" to be paid by all men/women lucky enough to be born white? Or, to generalize, a "race tax" to be paid by all based on the current social or economic status of each race in the society? Perhaps a tax to be paid by anyone lucky enough to gain entrance to an Ivy League school (or Stanford) and so forth.

2. Concerning your second argument (success due to others):

This argument was presented by Obama in his "...you didn't build that..." speech of July 13, 2012: https://en.wikipedia.org/wiki/You_didn't_build_that

3. However, in summary, both arguments, although well taken and each worthy of discussion in it's own right, are clearly not the same as the findings that Bouchard & Mezard et al present.

Furthermore it is important to distinguish them from Bouchard & Mezard's. Merging these arguments together with Bouchard & Mezard's in public discussion would erroneously conflate all these arguments and weaken the impact of Bouchard & Mezard's findings.

greggyb• 11 years ago

The high turnover of the top 1%[0][1] would suggest that there is a higher standard to be met to justify government intervention to redistribute the fruits of luck.

Since the income and wealth are transient, it would seem necessary to show that the government's redistribution leads to a better outcome than time's.

I'd be curious to hear your thoughts on this. I'd assume that the argument would be that the government achieves equity more quickly, but at a cost. It would be interesting to see the discount rate to justify redistribution now rather than redistribution with time.

The alternative argument that comes to mind is that while the people move over time, there is a constant influx of new luck-wealth to replace the old luck-wealth such that, though it is different money, there is a permanent "luck fund" of sorts that should be drained on a regular basis, else we will have a permanent inefficient "luck fund".

Again, I'd be interested to hear your thoughts.

[0]http://marginalrevolution.com/marginalrevolution/2014/04/mob...

[1]I don't have the time to find more sources, but there is indeed quite a bit of churn in the top income brackets, and we see similar in wealth brackets - these are not static categories of people.

Review: ‘The Economics of Inequality,’ by Thomas Piketty

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