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Piketty Digest #15: Rethinking the Progressive Income Tax

by Adam David Morton on October 31, 2014
Piketty Forum

With all the furore surrounding Thomas Piketty’s Capital in the 21st Century my aim here is to carry a weekly focus on the book . The purpose is modest. There is already in existence some rather excellent coverage and detailed engagement with the book both in the general media and on specific blog sites. I am thinking here of the analyses by Michael Roberts on his blog site; the competing viewpoint or ‘afterthoughts’ of David Harvey; Benjamin Kunkel’s assessment in ‘Paupers and Richlings’ for London Review of Books matched by Knox Peden’s great essay on ‘The Abstractions of History’; or Paul Krugman’s rather different tone in ‘Why We’re in a New Guilded Age’ for The New York Review of Books. My own endeavour is much less ambitious than any of these engagements. It seeks to offer a weekly equivalent to the ‘Pocket Piketty’ provided by Duncan Green. Each week my intention is to carry a blog post that summarises my notes on each chapter in just a few hundred words that can be read quickly. The purpose of these summaries is to produce an interpretative synopsis of each chapter drawn from my more detailed notes.

These interpretative digests will also enable me to formulate my engagement with a reading group on Piketty’s Capital in the 21st Century, organised by Chris Hesketh at Oxford Brookes University. They will also provide a quick précis for teaching purposes at the University of Sydney and through this novel pedagogical exercise conclude with a question each week to be developed in my Department of Political Economy classes on ‘The Political Economy of Global Capitalism’ (linked to the Twitter hashtag #ECOP2613). Such short interpretative digests may thus provide a different and original form of engagement with the book. Without attempting to rival or replace the importance of detailed engagement, these ‘Piketty digests’ will facilitate a quick and accessible read for people ‘on the go’. The posts will be formulated and produced after reading each chapter, in dialogue with the Oxford Brookes University reading group and colleagues at the University of Sydney, rather than polished after completing the reading of the whole book and then subsequently edited; although I may tidy up a little week-to-week. Perhaps these ‘Piketty digests’ will also provoke some wider resonances and points of contact. Here is the fifteenth ‘Piketty Digest’ on ‘Rethinking the Progressive Income Tax’.

Chapter 14: Rethinking the Progressive Income Tax

InheritanceAs a platform for the next chapter that makes the case for a global tax on capital, this chapter raises some interesting lines of thought and a few facts about progressive income tax — For Piketty, progressive tax is regarded as indispensable to guaranteeing the benefits from “globalisation” while its absence may undermine support for a globalised economy — Progressive tax is a crucial component of the social state, as discussed in Chapter 13, and remains important for ensuring the viability of the social state in the future despite it being under threat intellectually and politically as a policy concern — With some interest for readers from Stoke-on-Trent, Piketty refers to Josiah Wedgwood’s musings in The Economics of Inheritance (1929) where the industrialist of the Potteries highlights that a steeply progressive inheritance tax is essential to achieving necessary economic democratisation — Citing Wedgwood directly, ‘political democracies that do not democratise their economic systems are inherently unstable’ — But there are at least two flaws in this logic in that, referring to Ellen Meiksins Wood, in the first instance, ‘constitutional capitalism made possible a form of democracy in which the formal equality of political rights has minimal impact on relations of domination and exploitation in other spheres’ — These assumptions about democracy and capitalism were revealed to be problematic in relation to the earlier chapter on merit and inheritance, see Chapter 11 — Second, let’s actually return to Josiah Wedgwood’s text to get a glimpse of his wider argument — In the preface, Wedgwood states:

In a world of “self-made” dictators, we tend to look back with regret to government by a hereditary oligarchy; and we know—now that we do not possess them—the value of those statesmen, like [William] Harcourt, [William] Gladstone and [Henry] Campbell-Bannerman, who inherited, along with their material fortunes, traditions of beneficence and a scorn of tyranny.

remains-of-the-dayThis faith in the traditions of beneficence held by the great statesmen of the day reminds one directly of the similar faith invested in the ‘great gentlemen’ in The Remains of the Day, in whose hands the future ‘well-being’ of the Empire was entrusted — These quibbles aside, Piketty does deliver some excellent factoids on progressive income tax, which historically after the Russian Revolution of 1917 was in Prussia at 40 percent in 1919-1920, while the top rate of income tax increased from 67 percent to 77 percent in the United States in 1918-1919, and in Britain it jumped from 8 percent in 1909 to more than 40 percent after World War I — Generally the rates in force before 1914 were always below 10 percent, differing little from tax rates in the eighteenth and nineteenth centuries — Top inheritance tax rates also increased throughout the course of the mid-twentieth century in the United States, Britain, France, and Germany to fall from the 1970s onwards — The United States was the first country to try high confiscatory rates at about 70 percent on excessive incomes in 1919-1922 and then on estates in 1937-1939 — In the United States, the top federal income tax rate averaged 81 percent and the top estate tax rate remained between 70 and 80 percent from the 1930s to the 1980s — British and US income tax rates fell from 80-90 percent from 1930 to 1980 to 30-40 percent from 1980 to 2010 — Piketty argues that the sense that ‘other countries were catching up contributed to the rise of Thatcherism and Reaganism’, although previous posts have debated his notion of catch up (see Chapter 1 and Chapter 13— A further important Piketty factoid is that there is a perfect correlation between the size of the decrease in the top marginal income tax rate between 1980 and the present and the top centile’s share of national income over the same period in developed countries — Hence the argument in this chapter about the need to rethink the top marginal rate: the optimal tax rate in developed countries is probably above 80 percent applied to incomes above $500,000 or $1 million a year, argues Piketty — This would not bring in revenue for governments, though, as its main objective would actually be to reduce the existence of such remuneration in the first place, thereby increasing pay at lower levels and necessitating rates of 50 or 60 percent on incomes above $200,000 as well, in order to obtain revenues for health and education — As Piketty concludes this chapter, ‘Such a social and fiscal policy is well within the reach of the United States’.

Question: How would you defend, or undermine, the case that the optimal tax rate in developed countries should be above 80 percent applied to incomes above $500,000 or $1 million a year?

Adam David Morton
Adam David Morton is Professor of Political Economy in the Department of Political Economy at the University of Sydney.

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