May 14th 2014

Inequality Disaster Prevention

NEW HAVEN – Thomas Piketty’s impressive and much-discussed book Capital in the Twenty-First Century has brought considerable attention to the problem of rising economic inequality. But it is not strong on solutions. As Piketty admits, his proposal – a progressive global tax on capital (or wealth) – “would require a very high and no doubt unrealistic level of international cooperation.”

We should not be focusing on quick solutions. The really important concern for policymakers everywhere is to prevent disasters – that is, the outlier events that matter the most. And, because inequality tends to change slowly, any disaster probably lies decades in the future.

That disaster – a return to levels of inequality not seen since the late nineteenth to early twentieth century – is amply described in Piketty’s book. In this scenario, a tiny minority becomes super-rich – not, for the most part, because they are smarter or work harder than everyone else, but because fundamental economic forces capriciously redistribute incomes.

In The New Financial Order: Risk in the 21st Century, I proposed “inequality insurance” as a way to avert disaster. Despite the similarity of their titles, my book is very different from Piketty’s. Mine openly advocates innovative scientific finance and insurance, both private and public, to reduce inequality, by quantitatively managing all of the risks that contribute to it. And I am more optimistic about my plan to prevent disastrous inequality than Piketty is about his.

Inequality insurance would require governments to establish very long-term plans to make income-tax rates automatically higher for high-income people in the future if inequality worsens significantly, with no change in taxes otherwise. I called it inequality insurance because, like any insurance policy, it addresses risks beforehand. Just as one must buy fire insurance before, not after, one’s house burns down, we have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains.

In 2006, I co-authored a draft paper with Leonard Burman and Jeffrey Rohaly of the Urban Institute and Brookings Institution’s Tax Policy Center that analyzed variations on such a plan. In 2011, Ian Ayres and Aaron Edlin proposed a similar idea.

Underlying such plans is the assumption that some substantial degree of inequality is economically healthy. The prospect of becoming rich clearly drives many people to work hard. But massive inequality is intolerable.

Of course, there is no guarantee that an inequality-insurance plan will actually be carried out by governments. But they are more likely to follow such plans if they are already legislated and take effect gradually, according to a formula known in advance, rather than suddenly in some revolutionary departure from past practice.

To be truly effective, increases in wealth taxes – which fall more on highly mobile retired or other affluent people – would have to include a global component; otherwise, the rich would simply emigrate to whichever country has the lowest tax rates. And the unpopularity of wealth taxes has impeded global cooperation. Finland had a wealth tax but dropped it. So did Austria, Denmark, Germany, Sweden, and Spain.

Increasing wealth taxes now, as Piketty proposes, would strike many people as unfair, because it would amount to imposing a retroactive levy on the work carried out to accumulate that wealth in the past – a change to the rules of the game, and its outcome, after the game is over. Older people who worked hard to accumulate wealth over the course of their lifetime would be taxed on their frugality to benefit people who didn’t even try to save. If they had been told that the tax was coming, maybe they would not have saved so much; maybe they would have paid the income tax and consumed the rest, like everybody else.

Moreover, once the reality of a Piketty-type wealth tax was understood, the rich might procreate more, because wealth in the form of children cannot be taxed away – which is why it would probably be better to tax income and maintain a deduction for philanthropic contributions outside of the family. And, if there are to be wealth taxes, instituting them now to take effect only in the future – and only if inequality becomes much worse – would preempt the perception that the rules had been changed after the game had ended.

The advantage of income-tax increases is that they could be based not just on current income, but on some average of income over the course of years, and could allow deductions for investments, thus sharing some features with wealth taxes without penalizing those who saved more to accumulate more wealth. Moreover, a long-term plan legislated by one or a few countries today, before any substantial impact on actual tax payments occurs, could help to promote an international dialogue about appropriate future policy toward inequality. That would create room for a more uniform tax response among countries, thus reducing the ability of the super-rich to evade taxation by switching location.

Piketty’s book makes an invaluable contribution to our understanding of the dynamics of contemporary inequality. He has identified a serious risk to our society. Policymakers have a responsibility to implement a workable way to insure against it.



Copyright: Project Syndicate, 2014.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Sep 24th 2020
EXTRACT: "China’s foreign minister, Wang Yi, recently declared that aggression and expansionism have never been in the Chinese nation’s “genes.” It is almost astonishing that he managed to say it with a straight face. Aggression and expansionism obviously are not genetic traits, but they have defined President Xi Jinping’s tenure. Xi, who in some ways has taken up the expansionist mantle of Mao Zedong, is attempting to implement a modern version of the tributary system that Chinese emperors used to establish authority over vassal states: submit to the emperor, and reap the benefits of peace and trade with the empire."
Sep 16th 2020
EXTRACT: "Seventy-five years ago, the prestige of the United States and the United Kingdom could not have been higher. They had defeated imperial Japan and Nazi Germany, and they did so in the name of freedom and democracy. True, their ally, Stalin’s Soviet Union, had different ideas about these fine ideals, and did most of the fighting against Hitler’s Wehrmacht. Still, the English-speaking victors shaped the post-war order in large parts of the world. The basic principles of this order had been laid down in the Atlantic Charter, drawn up in 1941 by Winston Churchill and President Franklin D. Roosevelt on a battleship off the coast of Newfoundland."
Sep 14th 2020
EXTRACT: "After Trump’s inauguration in January of 2017, millions demonstrated their disapproval. We can expect the same, no matter how this election turns out. With both sides framing this election in “end of the world” terms; with the president calling into question the legitimacy of the vote, even before it happens; and with the president warning his supporters that they may have to take up arms to defend him – we have a recipe for disaster that may occur in the days that follow this election. This may very well be the Armageddon election of our lifetime."
Sep 8th 2020
EXTRACT: "The Huawei case is a harbinger of a world in which national security, privacy, and economics will interact in complicated ways. Global governance and multilateralism will often fail, for both good and bad reasons. The best we can expect is a regulatory patchwork, based on clear ground rules that help empower countries to pursue their core national interests without exporting their problems to others. Either we design this patchwork ourselves, or we will end up, willy-nilly, with a messy, less efficient, and more dangerous version."
Sep 7th 2020
EXTRACT: "China’s footprint in global foreign direct investment (FDI) has increased notably since the launch of the Belt and Road Initiative (BRI) in 2013. That served to bring Chinese overseas FDI closer to a level that one would expect, based on the country’s weight in the global economy. China accounted for about 12% of global cross-border mergers and acquisitions and 9% of announced greenfield FDI projects between 2013 and 2018. Chinese overseas FDI rose from $10 billion in 2005 (0.5% of Chinese GDP) to nearly $180 billion in 2017 (1.5% of GDP). Likewise, annual construction contracts awarded to Chinese companies increased from $10 billion in 2005 to more than $100 billion in 2017."
Sep 2nd 2020
EXTRACT: "Emergence and spread of the coronavirus COVID-19 have created and still creating health issues, economic challenges, political crises and social conflicts around the world. These challenges and conflicts lead the international community to re-evaluate global governance and international structures, which is based on the second world-war and post-cold war. The pandemic will emerge a new era of international society that will not be similar to the pre-Corona world."
Aug 28th 2020
EXTRACT: "Russia has changed, and has been changing, since its beginnings in ancient Muscovy to its current condition as Putin’s realm. Some general features appear in much of Russian history. Most of its rulers have been authoritarian—but so, too, were most of England’s, France’s, and Germany’s. Many of its political and intellectual elites have considered Russia a special civilization deserving a place in the sun—but just as many have not, wanting to transform Russia into a Western state with Western values. Many Russians have been enamored of their country, but even more have probably damned it for destroying them and their children. What, then, is Russia? It is, and has always been, many, oftentimes contradictory, things—sometimes coexisting, sometimes getting the upper hand, always shifting, always eluding simplistic analysis. But, and this needs to be emphasized, the same holds true for every other country in the world."
Aug 26th 2020
EXTRACTS: "Double dips – defined simply as a decline in quarterly real GDP following a temporary rebound – have occurred in eight of the 11 recessions since the end of World War II. .............Financial markets aren’t the least bit worried about a relapse, owing largely to unprecedented monetary easing, which has evoked the time-honored maxim: “don’t fight the Fed.” Added comfort comes from equally unprecedented fiscal relief aimed at mitigating the pandemic-related shock to businesses and households.......This could be wishful thinking."
Aug 26th 2020
EXTRACTS: "There is no question that the re-election of President Donald Trump would endanger both the US and the world. Moreover, there is ample reason to fear that a close election could drive the US into a deep, prolonged constitutional crisis, and perhaps into civil violence.........One can only hope that the election will produce a decisive winner both in the Electoral College and in the popular vote. Yet, even then, tallying the final result may take time, owing to the massive increase in mail-in voting that is expected. Every ballot that has a postmark of November 2 or 3 (depending on the state) will be considered valid, which means that the final result will not be known until after Election Day. During that window of uncertainty, either or both campaigns may try to claim victory based on the current vote count. In any case, there is no chance that Trump will wait graciously in the Oval Office for days or weeks to receive the final tally. In interviews, he has already issued vague statements suggesting that he will not leave the White House if he loses; indeed, he seems to be actively preparing for such a scenario. If he follows through, the world’s leading superpower will find itself facing a protracted – and perhaps intractable – constitutional crisis.
Aug 26th 2020
EXTRACT: "the European Union is a community of values as much as an economic and trade bloc. But the behavior of member states such as Poland and Hungary has called into question their commitment to liberal democracy. Above all, in the US, President Donald Trump is widely criticized, even by lifelong Republicans, for not respecting or understanding the US constitution and the separation of the executive, legislative, and judicial branches. Does Trump even believe in democracy? Does he want all Americans to vote in November, regardless of race or party affiliation, or only those who will support him? And will he accept the election result if it goes against him? "
Aug 25th 2020
EXTRACT: "The fundamental difference in values between the West and China will remain indefinitely, and it is here that the West must draw the line. Any concession that entails a sacrifice of fundamental principles, for example in cultural matters, must be rejected. If this values-based approach results in economic disadvantages, so be it. By the same token, the West should abandon the conceit that it can push, force, or cajole China to become a democracy wrought in its own image. "
Aug 16th 2020
EXTRACT: "China is light years ahead of most of the rest of the world in deploying digital payment technology. Alipay or WeChat Pay apps are all that is necessary to accomplish almost anything that requires a payment in China; the country is largely already making paper money obsolete. "
Aug 15th 2020
EXTRACT: "Seven hundred fifty billion euros is less than 5% of the stock of US government debt held by the public. It’s a drop in the bucket, in other words. And a drop does not a liquid market in safe assets make. Even if this really is Europe’s “Hamiltonian moment,” ramping up EU issuance by a factor of 20 will take decades. "
Aug 14th 2020
EXTRACT: "But the race is not over. In the 2016 election, prices moved the most in the two months just before the election. Trump trailed Hillary Clinton in prediction markets throughout the campaign and was seen as favourite only on election day – showing that the underdog can recover. So despite Trump’s poor position now, he might still regain some ground."
Aug 11th 2020
EXTRACT: "Last year, in the midst of the country-wide protests against corruption, I was honored by a Lebanese humanitarian organization. I began my remarks paraphrasing Kahlil Gibran’s poem “You have your Lebanon, I have my Lebanon.” Like Gibran, I love the Lebanese people, their poetry, art, song, and love of life. I love their generous and welcoming spirit. I also love what Lebanon has given to the world – especially its gifted people. And I love the sheer beauty of the country – its majestic snow-capped mountains and its pristine seascapes. And, like Gibran, I do not love Lebanon’s petty bickering politicians who lead because of an accident of birth. Nor can I embrace the country’s system of sectarian privilege and the corruption that is endemic to the political-economic regime that has squeezed Lebanon dry to the benefit of their chosen ones. And I reject the armed militias, whether they be Christian, Muslim, or secular that in the past and in the present continue to torment those who challenge their dominance. I told the audience that the Lebanon I loved was in the streets making their voices heard demanding fundamental reform – an end to sectarianism, corrupt feudal elites, and rule by force of arms."
Aug 8th 2020
EXTRACT: "It is time for the world’s governments and companies to wake up. Beijing’s reach is wide and deep. It is taking advantage of the West’s openness – and gaps and inconsistencies in our data protection protocols - to acquire information on all of us. The hacks on Anthem, Equifax, Marriott, and the US government are good examples of how they have already done so. American and Western companies need to take a hard look at the costs and benefits associated with operating in China and continuing to have Chinese partners. Those partners must comply with these Laws. American and Western companies that continue to operate with them may unwittingly well be aiding and abetting the Chinese government."
Aug 5th 2020
EXTRACT: "James Murdoch is not the most obvious candidate for editorial heroism. His route to resigning from the News Corp board because of “disagreements over certain editorial content” has been circuitous and colourful."
Aug 4th 2020
EXTRACT: "Say what you will about the slippery slope the US government has been on since Trump came to power, America has a rich history of promoting creative thought, running head-first into particularly uncomfortable subjects, and encouraging robust debate internally and among its allies and partners. Once Trump leaves the scene, America is sure to be perceived as having briefly lost its senses and will come charging back into the mainstream of global thought, debate, and engagement. China has entered the global arena crippled by its own ideology. Ultimately, the US is better equipped to lead the world. It knows that, and so does most of the rest of the world. Someone had better tell Beijing."
Jul 29th 2020
EXTRACT: "The Chinese government has for years argued that its ‘nine-dash line’ of sovereignty over the entire Sea is based on centuries of maritime history, and that China’s claim is air tight. The Chinese Foreign Ministry has even asserted that ample historical documents and literature demonstrate that China was “the first country to discover, name, develop and exercise continuous, effective jurisdiction over the South China Sea islands”. "
Jul 23rd 2020
EXTRACTS: "Like many, I have long been critical of Europe’s Economic and Monetary Union as a dysfunctional currency area. Notwithstanding a strong political commitment to European unification as the antidote to a century of war and devastating bloodshed, there was always a critical leg missing from the EMU stool: fiscal union. Not anymore. The historic agreement reached on July 21 on a €750 billion ($868 billion) European Union recovery fund, dubbed Next Generation EU, changes that.................Unlike the United States, which appears to be squandering the opportunities presented by the epic COVID-19 crisis, Europe has risen to the occasion – and not for the first time."