Review: ‘The Economics of Inequality,’ by Thomas Piketty
nytimes.com
nytimes.com
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
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.
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.
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.
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.
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.
http://america.aljazeera.com/opinions/2015/3/the-estate-tax-...
The family farms story is a myth created (or maybe first given authority) by Bill Beach at the Heritage Foundation around 1996. It was part his plan for the rhetoric and talking points of an assault on the estate tax.[1]
repeal proponents are still unable to produce a single,
verifiable example of a farm or business closing due to
the burden of estate tax payments. [as of 2013]
I highly recommend the article below, which will change how you look at politics forever:
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.
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.
> 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.
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).
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?
The real problems, whatever they are, run much deeper than local funding of schools. Focusing on funding is a red herring.
I'm not sure it's a red herring. It may be necessary, but not sufficient.
Though if it wasn't for that it would be through a local school levy, or a fundraiser, or any number of other seemingly harmless methods of transferring money from parents to the school.
Even dumb ideas off the top of my head like "Wealthy parent A purchases 300 textbooks and donates them to the school so the school can spend that money on higher salaries for teachers" are probably legal ways for wealthy parents to supplement their local school.
Like a wise princess once said, "The more you tighten your grip, the more [wealthy parents] will slip through your fingers."
This is, IMO, a very progressive idea, and I totally expected it to fail. What I didn't expect was how badly it failed in the one of the most progressive/liberal towns in the state: Boulder.
It seems that, while the people in Boulder talk about helping others, when it comes to potentially reducing the (granted, excellent) quality of the schools in their own back yard, they vote selfishly along with the rest.
Sad.
Why won't we switch to that? Well, most homes owe a significant portion of their value to "being in a good school district" and most such homeowners have made a leveraged bet of most of their net worth in that home. Such reform would mean destroying that.
It would also mean schools trying to apply the same resegregation filters most parents want, at which point governments would have to adapt their criteria to stop that, and the arms races continues.
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.)
This is why estate planning exists. Any business that actually plans for estate taxes will not have this problem at all.
There is also no "estate planning" for various other incidents of the same issue, e.g. employees cashing out stock options.
By that argument, all taxation is bad because it diverts funds from other purposes. Yet we must pay for government services. Government is an investment; what you are saying, in effect, is that there are opportunity costs to the investment - a truth of every investment.
If the government took 30% of the shares of the company in lieu of the same amount in cash, the issue would be completely resolved. There would be no reason not to invest in the business - the government takes 30% (or whatever the rate is) of shares regardless.
The problem is that turning illiquid assets into cash costs extra money.
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.
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?
https://www.cbo.gov/sites/default/files/07-06-estatetax.pdf
See also these survey results, which suggest estate taxes limit business growth and shrink businesses: http://coles.kennesaw.edu/centers/cox-family-enterprise/cox-...
This probably underestimates the nature of the issue, since as noted, a business with an aging owner will engage in estate planning and will liquidate sufficiently over time as to not enter the 5%. This, in turn, diverts cash from investment into unnecessary liquidity.
Note also that this isn't an anti-estate tax argument. This is an argument against demanding cash tax payments for in-kind transfers. It applies to more than just estates, e.g. startup employees exercising their options, and does not apply to estates which are comprised of highly liquid assets (cash, SPY). There is no need to spout pro-taxation talking points, I'm discussing a technical detail of payment methods.
I thought it was interesting where the survey referenced 'paying off taxes will involve selling all/part of the business". This was around 40% positive across the categories. While firstly I'd take results with a pinch of salt as the people answering likely have an agenda to push, and a survey is not always reality. But having to sell some of a business is not a bad thing from a community POV. It keeps capital circulating in an economy. This offsets one on the main weaknesses of capitalism, that capital keeps concentrating. This conversation is about an equal society, so in that context I feel this is a good result, stopping people forever accumulating assets without having to release them. Hence it would be an easy argument liquidity problems from estate taxes could be a good thing for ensuring an equal society.
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.
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.
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:
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.
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.
It's the person who worked hard for it who's giving it to his heirs. It's not money falling from the sky.
That's why it ought to be limited more than it is now.
For example, the estate tax in 2001 was less than $700k exempted, above that you paid 55%. So you could get more than half a million tax free, and if you got say 5 million more, you'd keep another 2.5 million. It's still a gigantic advantage over everyone else to inherit $675k tax free, and half of anything above that. (I inherited money myself, and it's ludicrous).
By 2008 the figure shot up to $2m exempt from taxes, and the tax rate above that dropped to 45%.
And then a weird thing happened, it went to $5m by 2011 and the rate dropped further, to 35%. Today it's beyond even that, and it's starting to get insane.
Now look at what that means. Imagine inheriting $5m and putting it towards stocks, which have a long term average ROI of 7%, already inflation adjusted. You'd get an annual salary of $350k, taxed low by the way because top capital gains tax rates are much lower than top tax rates on labor.
Imagine 'receiving' a ticket for a lifetime (inflation-adjusting & compounding) $350k income-per-year like that from someone else who actually worked for it (or guess what, inherited it himself), would you ever have to work? Would you have a difficult time increasing that money while spending $100k on yourself per year, without working? Would you be able to give away more money at the end of your life than you received, without ever working? Would receiving this financial claim over other people's future work (a definition of money) based on blood right be akin to medieval nepotism? Would this create a system not just with unequal outcomes, but with inequality by design? The answer to all these questions is yes.
Which is why it's time to consider reforming estate tax. I'm sympathetic to receiving and giving part of your wealth to others without the government stepping in. And we can keep that to large amounts, like say $100k. But there have to be limits, and the limit of $5.5m and just a 40% tax above that like we have today, is way too high.
Don't folks of your politics normally argue that with a basic income people would still work?
> Would this create a system not just with unequal outcomes, but with inequality by design?
Nature is unequal by design. Unless you're arguing for some Harrison Bergeron-type future where we scar attractive people and literally cut tall people off at the knees, there's nothing you can do about it. What you're proposing is the financial equivalent.
> And we can keep that to large amounts, like say $100k.
$100,000 is not a large amount: it's 1-5 years' salary (or less!).
> But there have to be limits
Why?
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.
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]
> ... 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
1) Cowen is saying that the rich engage in tax avoidance. While, in the article Meagher is describing “how and why the estate tax became part of the pro-family agenda of social conservatives.”
(There’s a ton of data on it: see “Tax Avoidance Saves Wealthiest Americans $3 Trillion Each Year” http://www.huffingtonpost.com/2013/01/07/tax-avoidance_n_242...)
2) re: “This seems very speculative.” The point that I’m making is about the time value of money. (I’m not making a Reaganomics supply side argument.) My point is, a dollar before a death tax is worth a lot more than after the death tax --- there’s enormous evidence for that (and even without a death tax based on time value decay alone it is true.) Admittedly, I am assuming that rich people would rather not voluntarily give money to the government, even if they don’t want to give it to their heirs. (ie. The Giving Pledge the super rich make to philanthropy.)
I'm a bit confused by this. In the quote I included, Meagher describes the talking points planned by Beach as including "decreased revenue through other taxation", which is what Cowen claims happens due to tax avoidance. I'm not sure why you refer to a sentence from a summary of Meagher's article (though I realize the article is behind a paywall, sorry), which I didn't mention and doesn't seem to apply.
> I’m not making a Reaganomics supply side argument.
I didn't mean to say you were, sorry. I meant, like those Reagonomics arguments, it's yet another speculative reason why the wealthy shouldn't pay their share of taxes. But regarding its speculative nature you say that ...
> there’s enormous evidence for that
I believe there is an enormous number of arguments behind it, but given the organized propaganda campaign and the fact that this point matches one of its talking points, I'd have to judge the evidence for myself. It's not reasonable to expect you to do research and provide it for the sake of a HN discussion, but if you could happen to recommend any I'd appreciate it. Thanks.
> death tax
As I mention elsewhere, this term for the estate tax, it's proper name, was a major, carefully implemented part of that same propaganda campaign.
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.
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.
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,...
The problem here is the first amendment. It explicitly protects the right to assemble and petition the government for a redress of grievances.
Or paying $300K to hear them speak for 30 mins:
http://www.zerohedge.com/news/2015-08-03/everyday-americans-...
Yes, though, much aggrandizing in academia
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".