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

Jan 21st 2022
EXTRACTS: "The fear is that Moscow is backing itself into a diplomatic corner where the use of force is its only way to remain credible." ----- "The Ukrainian population has also been mobilizing in support of the troops since the seizure of Crimea and the war in Donbas. And according to a poll taken in December 2021 by the Kyiv International Institute of Sociology, 58% of Ukrainian men and almost 13% of women declared that they are ready to take up arms. A further 17% and 25% more said they would resist through other means. In what would be a classic case of asymmetrical warfare, resistance from Ukraine’s population could therefore prove a serious thorn in Moscow’s side."
Jan 12th 2022
EXTRACTS: "While at the time of writing, the outcome of Djokovic’s visa troubles was uncertain, the double standard of rules raises a much bigger question about the philosophy of law: can the application of a rule be so unfair that we have no valid reason to follow it?" ------ "......a rule that doesn’t treat like cases alike can’t be a law at all. This is because a key requirement of a legal system is that it needs to be stable, which means that people need to know what the law is and when it applies. If a rule doesn’t treat everyone equally, then it does the opposite and increases doubt and uncertainty about what the law even is. And if enough rules exist that create uncertainty about what the law is and when it applies, the system will collapse. A rule that undermines a legal system in this way can’t really be law at all, and legal officials shouldn’t create or uphold them."
Jan 9th 2022
EXTRACT: "Novak Djokovic, the world’s top-ranking tennis player, has just been granted a medical exemption to take part in the Australian Open. Djokovic, who has won the event nine times (one more victory would give him a record-breaking 21 major titles), refused to show proof of vaccination, which is required to enter Australia. “I will not reveal my status whether I have been vaccinated or not,” he told Blic, a Serbian daily, calling it “a private matter and an inappropriate inquiry.” The family of Dale Weeks, who died last month at the age of 78, would disagree. Weeks was a patient at a small hospital in rural Iowa, being treated for sepsis. The hospital sought to transfer him to a larger hospital where he could have surgery, but a surge in COVID-19 patients, almost all of them unvaccinated, meant that there were no spare beds. It took 15 days for Weeks to obtain a transfer, and by then, it was too late."
Jan 9th 2022
EXTRACT: "The protests that erupted across Kazakhstan on January 2 quickly turned into riots in all of the country’s major cities. What do the protesters want, and what will be the outcome of the country’s most severe civil unrest since independence in 1991? "
Jan 7th 2022
EXTRACT: ".....one wonders how Chinese President Xi Jinping views Russia’s intervention in Kazakhstan, which shares a nearly 1,800-kilometer (1,120-mile) border with China, especially in light of Putin’s earlier comments diminishing the history of Kazakhstan’s independent statehood. (He has shown similar contempt for the independence of Belarus, the Baltic states, and Ukraine.)"
Jan 7th 2022
EXTRACT: "The problem with history as propaganda is not that it makes people feel good or bad, but that it creates perpetual enemies – and thus the perpetual risk of wars."
Jan 5th 2022
EXTRACT: ".....a scenario in which Trump (or one of his allies) is designated president by the House of Representatives after the 2024 election probably belongs in the realm of political-thriller fiction.  Now consider the unlikely event that Trump were nominated and won a clear Electoral College or popular-vote majority in 2024. Rather than establish the white-nationalist dictatorship of progressive nightmares, an elderly second-term Trump would most likely be an even more ineffectual figurehead in a party dominated by conventional Republicans than he was in his first four years. If Italian democracy could survive three terms of Silvio Berlusconi as prime minister, American democracy can survive two terms of Trump. None of this is to suggest that American democracy is not under threat. Populist demagogues like Trump are symptoms of a disease in the body politic. The real threat to American democracy is the disconnect between what the bipartisan US political establishment promises and what it delivers. This problem predates Trump by decades and helps to explain his rise. "
Jan 4th 2022
EXTRACT: "This month, the world’s major central banks shifted gears and announced plans to tighten monetary policy. But there was one notable exception: the European Central Bank, which says it does not intend to raise interest rates in 2022, even though it is well aware of today’s inflation risks." ----- "Does this mean that the ECB is “soft on inflation,” occupying a dovish outlier position among the world’s major central banks? Is Germany’s bestselling tabloid, Bild, justified in bestowing on ECB President Christine Lagarde the mocking sobriquet “Madame Inflation”? No and no.
Dec 21st 2021
EXTRACTS: "By the grim metric of fatalities in the first 10 years of a dictator’s rule, Kim Jong Un has yet to match the records set by his grandfather, Kim Il Sung, or father, Kim Jong Il – the two tyrants who reigned by terror in North Korea before him. For now, the number of people Kim Jong Un has personally ordered killed – such as his uncle in 2013 and half-brother in 2017 – is likely to number in the hundreds." ---- "Concrete numbers of how many have died from starvation and malnourishment-related conditions such as diarrhea and pneumonia under Kim are difficult to come by. But as a scholar of Korean history, I believe the young dictator – who turns 38 next January – has the capacity to surpass even the ghastly death tolls of his two familial predecessors."
Dec 19th 2021
EXTRACTS: "But have enough Conservative backbenchers reached the conclusion that Johnson should be removed as party leader? There is a historical precedent which throws light on the present situation. This was when Margaret Thatcher was sacked as leader of her party – and consequently lost her job as prime minister – in 1990. She had a loyal following in the party and had won three elections in a row, but even that couldn’t save her when polling showed that the Conservatives were heading for a serious defeat under her leadership. ---- "That said, if Thatcher’s experience is anything to go by, at present the Conservatives are not going to sack Johnson. It took 18 months of seriously deteriorating polling for a revolt over Thatcher’s leadership to finally succeed – and she almost survived the leadership challenge. The present hope among Conservative backbenchers will be that the party can recover next year."
Dec 11th 2021
EXTRACT: "Although Johnson has a well-deserved reputation for maintaining an arm’s-length relationship with the truth, many voters seem to have priced this in to how they perceive him. Moreover, Conservative Party insiders, and those who previously worked with Johnson in journalism (his career before politics), have always known that he was unlikely to follow any rules that did not suit him. This rather large personal failing was apparent even in his boyhood, as a remarkably prescient school report by his Eton College housemaster noted. “I think,” Johnson’s teacher wrote, “he honestly believes that it is churlish of us not to regard him as an exception, one who should be free of the network of obligation which binds everyone else.” "
Dec 8th 2021
EXTRACT: "This puts US Democrats in a difficult position. What is a political party to do when the other main party has been taken over by self-appointed holy warriors? To treat them as a loyal opposition worthy of engagement in a spirit of compromise and respect becomes almost impossible. Democrats like Hillary Clinton, Barrack Obama, and Joe Biden have sometimes been criticized by their own supporters for not fighting dirty and giving Republican fanatics a dose of their own foul medicine.  That would be a mistake. All legal means should be used to stop extremists from wrecking democratic institutions, but those institutions won’t survive if all parties turn politics into a matter of life and death. In a quasi-religious war, the far right will almost certainly win; they have more fanatics and, in the US, many more guns."
Dec 4th 2021
EXTRACT: "In contrast to the index for consumer goods, which measures only the prices of final products, industrial producer prices capture all intermediate stages of production. They therefore have a certain prognostic significance for consumer prices, even though the final products won’t show such extreme spikes. ----- These new inflation figures are so extreme that the ECB’s position looks like willful denial. Germany is currently experiencing the strongest inflation in a lifetime. And the situation is not much better in other European countries. In September, France reported an 11.6% annual increase in industrial producer prices, and that figure stood at 15.6% in Italy, 18.1% in Finland, 21.4% in the Netherlands, and 23.6% in Spain."
Nov 30th 2021
EXTRACT: "So it could well be that, despite the faster spread of the infection, its ultimate health, social and economic impact proves negligible. We simply do not know at this point. But detecting more uncertainty than before, financial markets have reacted with panic. For example, the S&P500 tumbled 2.3% on Friday November 26 only to rise 1.1% on Monday November 29. Most markets gave up between 2% and 4%, which is a pretty substantial one-day fall."
Nov 28th 2021
EXTRACT: "Momentous changes are casting a long shadow on China. The country’s political system will soon undergo a profound reform, pending final approval (a quasi-formality) at next year’s congress of the Communist Party of China (CPC). President Xi Jinping, the Party chairman and the “navigator” of the country, has decided on a new course, abandoning the principle of collective leadership. Xi is leading China away from the path taken by Deng Xiaoping after the terror of the Cultural Revolution, and back toward a system of absolute rule by one person without term limits, as under Mao Zedong."
Nov 25th 2021
EXTRACTS: "”The biggest disappointment in Glasgow was the last-minute watering down of the proposed (and widely supported) agreement to “phase out” the use of coal in energy production. With India providing political cover for China in vetoing this language, the final conference proposal was to “phase down” coal”. ---- “China accounts for more than half of the world’s coal consumption, and has the largest amount of coal-fired generating capacity under construction. Pressed about why his country would not do more in Glasgow to help save the planet, China’s chief negotiator pointed to the commitments in the Communist Party of China’s current Five-Year Plan. So, our future now depends on the CPC’s program. The tragedy for the world is that the Party cannot be phased down, much less phased out, despite the fact that it is a huge threat to the future of all of us.” ------ “To save the planet, robust democratic leadership must be phased up – not phased down, let alone phased out. Rather than merely keeping our fingers crossed and hoping for the best, we should start by calling out the appalling behavior of dictatorships such as China and Russia.”
Nov 22nd 2021
EXTRACT: "The transitory inflation debate in the United States is over. The upsurge in US inflation has turned into something far worse than the Federal Reserve expected. Perpetually optimistic financial markets are taking this largely in stride. The Fed is widely presumed to have both the wisdom and the firepower to keep underlying inflation in check. That remains to be seen."
Nov 14th 2021
EXTRACT: "S&P projects that companies are planning to install 44 gigawatts of new solar in 2022. The year 2020, despite the onset of the pandemic, saw a record-breaking 19 gigawatts of new solar capacity installed in the U.S. So given the bids out there already, it appears that in 2022 solar installers will more than double their best year ever so far. The U.S. currently has 100 gigawatts of solar electricity-generating capacity, so in just one year we are poised to add nearly 50% of our current total. A gigawatt of power can provide electricity to about 750,000 homes. So the 44 new gigawatts we’ll put in next year have a nameplate capacity that would under ideal conditions allow them to power 33 million homes." ----- "Not only is there a lot of good news on the green energy front but there is good news in the bad news for fossil fuels. S&P finds that coal plants are being retired way before the utilities had expected. Some 29 gigawatts of coal retirements are expected from 2020 through 2025. "
Nov 3rd 2021
EXTRACT: "Zemmour’s way of thinking stems from a tradition going back to the French Revolution of 1789. Catholic conservatives and right-wing intellectuals, who hated the secular republic that emerged from the revolution, have long fulminated against liberals, cosmopolitans, immigrants, and other enemies of their idea of a society based on ethnic purity, obedience to the church, and family values. They were almost invariably anti-Semitic. When Jewish army Captain Alfred Dreyfus was falsely accused of betraying his country in the notorious scandal of the 1890s, they were on the side of Dreyfus’s accusers. ---- Germany’s invasion of France in 1940 gave reactionaries of this kind the chance to form a French puppet-government in Vichy. Zemmour has had kind things to say about the Vichy regime. He also has expressed some doubt about the innocence of Dreyfus. ---- None of these views would be surprising if they came from a far-right agitator like Jean-Marie Le Pen. But Zemmour is the son of Sephardic Jewish immigrants from Algeria who lived among the Muslim Berbers."
Oct 27th 2021
EXTRACT: "performed strongly in last month’s parliamentary and regional elections. Officially, Communist Party candidates took 18.9% of the popular vote for the State Duma (parliament), compared to nearly 49.8% for the Kremlin’s United Russia party. But the Communists refused to recognize the results, insisting that the vote was rigged. And, indeed, some experts estimate that they should have gotten around 30% of the vote, with United Russia taking about 35%."