The inequality “problem” — the growing gap between the very rich and those near the bottom — has become a popular topic of discussion ever since the release of French economist Thomas Piketty’s book, Capital in the Twenty-First Century, earlier this year. It’s over 600 pages long, so I doubt that anyone has actually read it (Bill Gates claims that he has), but everyone knows what Piketty has identified as the problem — a growing disparity of income and, more importantly, wealth; and his solution — an annual wealth tax, coupled with a steeply progressive income tax.
Just what our lethargic economy needs. Yet, Piketty’s work has become phenomenally popular, and seems to be taken seriously by a lot of people who should know better. It’s not just liberal economists like Paul Krugman and Robert Reich, or liberal politicians like Elizabeth Warren and Hillary Clinton. It’s also Fed Chair Janet Yellen, billionaire Bill Gates, and others, all of whom appear to buy into Piketty’s general premise that the gap is too large, and that too much financial inequality is a bad thing.
“Inequality” is a powerful word with all sorts of negative connotations, so it’s not surprising that nobody has been willing to stand up and speak out in favor of it. Perhaps somebody should. A disparity in income and wealth accumulation is an inherent feature of the capitalist system, and a big part of what makes it work so effectively. It drives individuals to educate themselves, work hard, work smart, and invest wisely.
As noted above, Piketty is a French economist. Born there, educated there, lives there. France — a country with an unemployment rate consistently over 10% and a GDP growth rate of zero; a country that has had a wealth tax since the 1980s; an income tax that tops out at a 75% rate; and has seen the flight of billions of dollars of capital. I mean, why wouldn’t we want to listen to this guy and hear his solutions to our inequality problem?
France isn’t the only country with a wealth tax. You can throw in Spain (with its 25% unemployment rate and negative GDP growth), along with Iceland, India, and a few others. Politically, it’s easy to see how such a tax comes to pass. The rates seem low, only a percent or two; and the tax applies only to the rich. Piketty recommends an annual one percent tax on net worth between $1.3 million and $6.5 million, and a two percent tax on net worth above $6.5 million. An easy sell to an unhappy electorate in a stagnant economy. But what would it accomplish? Yes, the rich will become a little less rich each year. But the tax does nothing to improve the financial lot of anyone else. It simply takes wealth out of the hands of those who have proven themselves most adept at earning and investing capital, and puts it in the hands of the government. How can that possibly achieve economic growth?
We really shouldn’t concern ourselves with the size of the financial gap as long as living standards remain high, absolute poverty levels are low, and access to the top is open. The Forbes 400 list isn’t comprised of Vanderbilts, Rockerfellers and Fords. It’s full of Gates, Zuckerbergs and Ellisons. Its turnover is remarkable. The absolute poverty level in the U.S. is low. Most of our poor (and “poor” is indeed a relative term) have a living standard that would be considered quite comfortable by most of the world.
The economy is not a zero-sum game; it’s not a fixed-size pie. The fact that those at the top have a big slice doesn’t mean that those at the bottom have received a smaller slice as a result. The economy is a living organism, capable of tremendous growth if given the right environment. That growth creates jobs, higher wages, and opportunity. Our wealthiest citizens don’t squander their wealth on lavish personal expenditures. They reinvest it — something they’ve proven themselves quite adept at doing. If they continue to do so, our economy will continue to grow, producing new jobs and new opportunities for all.
Jeff Lerner is a tax attorney who resides in Fort Worth, Texas. Over a 40 year career, he has provided legal representation to a diverse list of clients, including railroads, energy companies and Indian tribes. He was formerly Vice President-Taxes for the Burlington Northern Railroad Company (now BNSF).