We Must Turn Back Piketty’s Charge

by Burt on May 1, 2014

The latest book to capture “ooh-la-las” from Keynesian economists is Thomas Piketty’s Capital in the 21st Century. Piketty is a French economist, and Paul Krugman calls his new book “superb” and a “tour de force.” But actually, “tour de farce” might be more accurate.

In Piketty’s new book, he argues that inequality has increased during the last five years, and that a “wealth tax” is needed to redistribute income to that ever larger group that seems to be falling through the safety net. In Piketty’s American tour, he has met with officials from the Obama administration, and they are crafting ways to translate his research into public policy.

Piketty’s research does have merit, but he is derailed on two points. First, inequality has increased in the last five years because opportunities have decreased. For example, the weak economy since 2008, and the bloating of government, have hiked the numbers on food stamps from 29 to 48 million. The decline in incomes of the poor and middle class in the last five years has indeed increased inequality. Since wealthier Americans typically have much of their wealth in the stock market (which has doubled since 2008), they have tended to gain. But that condition begs for tax cuts and a freer economy to create jobs for the unemployed and more upward mobility for the middle class.

Piketty’s prescription of a wealth tax, perhaps more than 70% on rich people, is one of the oldest follies of the Keynesians. It never worked as intended and never will. It assumes that the rich will pay almost 3/4 of their annual income to the government and that the government will in turn transfer that cash to the poor. Wrong on both counts.

In the 1930s, when Presidents Hoover and Roosevelt increased the top income tax rate from 25 to 79%, the amount of revenue collected from rich people dropped in half. They sheltered their income in tax free bonds, collectibles, or foreign investments. Piketty admits that rich people have done well in the ongoing economic crisis of the Obama years, and they are not going to give huge chunks of cash to Uncle Sam without a fight. And what we saw under Presidents Roosevelt and Obama is that what increased revenue they did bring into the treasury went for targeted voting groups, not to poor folks. Unions and crony capitalists grabbed their favors and subsidies in the 1930s as rapidly as they do today.

For example, GM got a bailout under Obama, and under FDR, GM wrote a code under the National Recovery Act that allowed them to fix prices, wages, and, in effect, profits on all cars sold in the U.S. Ford Motor Company, by contrast, received no bailout under Obama and no protection under the National Recovery Act from FDR.

The idea of robbing the rich to give to the poor goes back to Robin Hood, and it makes for exciting rhetoric–but the lasting result is horrendous public policy. Economist Robert Lucas, who won the Nobel Prize in 1995, was wise when he observed, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

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