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Henderson on Piketty, Part 3
From EconLog.
"More excerpts from my recently published review of Thomas Piketty's Capital in the Twenty-First Century.
For those who are worried about growing wealth
inequality because their own wealth is not growing, there is a simple
solution: save more and invest in stock market index funds. And, to the
extent possible, do so with tax-favored 401(k) and 403(b) plans and
Individual Retirement Accounts (Roth or non-Roth.) When a friend who
studies saving patterns of various ethnic groups in America visited me
some years ago, I told him that my wife and I normally save between 15
and 20 percent of our before-tax income. His eyes grew wide. "You're
Korean," he said, jokingly. Of course, hitting that saving rate meant
that we didn't go to Europe or Asia, didn't buy $40,000 cars or $200
shoes, didn't buy expensive clothes, and didn't drink alcohol when we
went to restaurants. What a tough life!
Piketty does not give any space in his tome to making that point. He
writes as if he is the central planner making decisions from the top
down and essentially disregards the fact that people are individuals who
want to deal with their individual situations.
But even as central planner, Piketty fails. The driver of his model
is his strongly held assumption that the rate of return on stocks will
substantially exceed the growth rate of the economy and the growth rate
of real wages. Under Social Security, your benefits will grow at no more
than the growth rate of real wages because your benefits are paid by
Social Security taxes on current workers. So, wouldn't it make sense to
let people invest their Social Security taxes in stocks rather than get
only the low rate of return that they get now? Piketty says no. He makes
one good argument for this, one I myself have made: the transition
problem out of the Social Security Ponzi scheme is wicked. But his other
argument is that investing in stocks is "a roll of the dice." What
happened to his confidence about the rate of return on stocks?
Given his emphasis on--and distaste for--inequality and his
conclusion that owners of capital will get an increasing share of an
economy's output, it is not surprising that Piketty favors much higher
taxes on wealthy people. He argues briefly that the optimal top income
tax rate in richer countries is "probably above 80 percent." He claims
that such a rate on incomes above $500,000 or $1 million "will not bring
the government much in the way of revenue"--I agree--but will
drastically reduce the pay of high-paid people. He also suggests an
annual "global tax on capital," with rates that would rise with wealth.
"One might imagine," he writes, "a rate of 0 percent for net assets
below 1 million euros, 1 percent between 1 million and 5 million, and 2
percent above 5 million." One might imagine many things: I take it, as
virtually every reviewer pro or con has, that Piketty is not just
"imagining" those taxes, but actually advocating them. He adds that "one might prefer" a stiff annual tax of "5 or 10 percent on assets above 1 billion euros."
But if there is anything we know in economics, it is that incentives
matter. An annual tax on capital will reduce the incentive to create
capital. With less capital than otherwise, the marginal product of
workers will be lower than otherwise. Bottom line: Piketty's proposed
tax on capital would hurt labor."
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