Shattered Consensus. James Piereson
it does not follow that returns to capital, even if they are greater than overall growth in incomes, must be concentrated in a few hands instead of being distributed widely in pension funds, retirement accounts, college and university endowments, individual savings, dividends, and the like. Nor is it true that higher returns to capital must come at the expense of labor, since growing productivity advances the standard of living for everyone; workers benefit along with everyone else when their savings or pensions grow with increasing returns to capital. The low and still falling interest rates of recent decades suggest that returns for at least some forms of capital are similarly falling. There is also a natural check on the concentration of capital: owners of capital die sooner or later, at which time their assets are disbursed through estate taxes, charitable gifts, and bequests to heirs.
Why, then, has capital grown in recent decades as a share of national income and in relation to labor income? The answer is to some extent embedded in Piketty’s definition of “capital.” He defines “capital” in a broad way to include not only inputs into the production process, like factories, equipment, and machinery, but also stocks, bonds, personal bank deposits, university and foundation endowments, and residential real estate—all assets that are subject to substantial year-to-year fluctuations in market value. In his measure of “capital,” then, Piketty is undoubtedly incorporating the explosion in asset prices that has occurred since the early 1980s, especially in stocks and to a lesser degree in real estate as well.
Many reviewers of Capital in the Twenty-First Century have slighted Piketty’s larger themes of the “iron law” of capitalism, the increasing returns to capital, and the competition between labor and capital for shares of national income. Instead, every major review of the book dwells at length on its documentation of rising inequality and its call for new and higher taxes on the wealthy. Piketty sees inequality as an inevitable byproduct of modern capitalism, and substantially higher taxes as the only means of remedying it.
He has assembled a wealth of data that allow him to trace the distribution of wealth and incomes in the United States and Western Europe from late in the nineteenth century to the present day. His analysis yields a series of U-shaped charts showing that the shares of wealth and income claimed by the top 1 percent or 10 percent of households peaked between 1910 and 1930, then declined and stabilized during the middle decades of the century, and then began to rise again after 1980.
In the United States in the decades before the Great Depression, the top 1 percent received around 18 percent of total income and owned about 45 percent of total wealth. Those figures fell to around 10 percent (share of income) and 30 percent (share of wealth) between 1930 and 1980, at which point these shares started to grow again. As of 2010, the top 1 percent in the United States received nearly 18 percent of total incomes and owned about 35 percent of the total wealth. The pattern is similar for the top 10 percent of the income and wealth distributions. Before the Great Depression, from 1910 to 1930, this group claimed about 45 percent of national income and between 80 percent of the wealth; between 1930 and 1980, those shares fell to roughly 30 percent (income) and 65 percent (wealth); and from 1980 to 2010 their shares increased again to between 40 and 50 percent (income) and 70 percent (wealth). Piketty also shows that the super-rich, the top one-tenth of 1 percent of the income distribution (about 100,000 households in 2010), increased their share of national income from about 2 percent in 1980 to nearly 8 percent in 2010. The patterns are similar in the other Anglo-Saxon countries—Great Britain, Canada, and Australia—but very different in continental Europe, where the wealthiest groups have not been able to reclaim the shares of income and wealth that they enjoyed before World War I.
There is little mystery as to the sources of the U-shaped curves in income and wealth distribution in the United States and the flatter curves in continental Europe. In Europe in particular, the two great wars of the first half of the twentieth century, combined with effects of the Great Depression, wiped out capital assets to an unprecedented degree, while progressive taxes enacted during and after World War II made it difficult for the wealthiest groups to accumulate capital at the same rates as before. In the United States, the Depression wiped out owners of stocks, and high marginal income tax rates (as high as 91 percent in the 1940s and 1950s) similarly made it difficult for “the rich” to accumulate capital. Beginning in the 1980s, as rates were reduced on incomes and capital gains, especially in the United States and Great Britain, those old patterns began to reappear.
Piketty highlights a new factor in wealth distribution since the 1980s: the dramatic rise in salaries for “supermanagers,” which he defines as “top executives of large firms who have managed to obtain extremely high and historically unprecedented compensation packages for their labor.” This group also includes highly compensated presidents and senior executives of major colleges, universities, private foundations, and charitable institutions, who often earn well in excess of $500,000 per year. Surprisingly, then, “the rich” today are likely to be salaried executives and managers, rather than the “coupon clippers” of a century ago who lived off returns from stocks, bonds, and real estate. “The 1 percent,” in other words, are people who work for a living.
Piketty doubts that these supermanagers earn their generous salaries on the basis of merit or contributions to business profits. He also rejects the possibility that these salaries are in any way linked to the rapidly growing stock markets of recent decades. He points instead to cozy and self-serving relationships that executives establish with their boards of directors. In a sense, he suggests, they are in a position to set their own salaries as members of a “club” alongside wealthy directors and trustees.
To alleviate the growing inequality problem, Piketty advocates a return to the old regime of much higher marginal tax rates in the United States and Europe. He thinks that marginal rates in the United States could be increased to 80 percent (from 39.5 percent today) on the very rich and to 60 percent on those with incomes between $200,000 and $500,000 per year without reducing their productive efforts in any substantial way. Such taxes would hit the so-called supermanagers who earn incomes from high salaries, though it would not touch the owners of capital who take but a small fraction of their holdings in annual income.
As a remedy for this problem, Piketty advocates a global “wealth tax” on the super-rich, levied against assets in stocks, bonds, and real estate. He acknowledges that such a tax has little chance of being imposed globally, though he hopes that at some point it might be applied in the European Union. Several European countries—Germany, Finland, and Sweden among them—had a wealth tax in the past but have discontinued it. France currently has a wealth tax that tops out at a rate of 1.5 percent on assets in excess of ten million euros (or about $14 million). The United States has never had such a tax, and in fact it may not be allowed under the Constitution (which authorizes taxes on incomes).
Wealth taxes are notoriously difficult to collect, and they encourage capital flight, hiding of assets, and disputes over pricing of assets. They require individuals to sell assets to pay taxes, thereby causing asset values to fall. Piketty thinks that a capital tax would have to be global in scope to guard against capital flight and the hiding of assets in foreign accounts. It would also necessitate a new international banking regime under which major banks would be required to disclose account information to national treasuries. Under this scheme, a sliding-scale tax would be imposed, beginning at 1 percent on modest fortunes (roughly between $1.5 and $7 million) and perhaps reaching as high as 10 percent on fortunes in excess of $1 billion. Wealthy individuals like Bill Gates and Warren Buffett, with total assets in excess of $70 billion each, might have to pay as much as $7 billion annually in national wealth taxes. In the United States, with household wealth currently at around $80 trillion, such a tax, levied even at low rates of 1 or 2 percent, might yield as much as $500 billion annually. The purpose of the tax, it should be stressed, is to reduce inequality, not to spend the new revenues on beneficial public purposes.
Piketty implies that reductions in taxes over the past three decades have allowed “the rich” to accumulate money while avoiding their fair share of taxes. This is not the case at all, at least not in the United States. As income taxes and capital gains taxes were reduced in the United States beginning in the 1980s, the share of federal taxes paid by “the rich” steadily went up. From 1980 to 2010, as the top 1 percent increased their share of before-tax income from 9 to 15 percent, their share of the individual