While Thomas Piketty has identified serious shortcomings in the global economic landscape, his policy prescriptions may be disastrous.
Thomas Piketty is a professor at the Paris School of Economics and author of the best-selling book Capital in the Twenty-First Century, which illustrates the unsustainable degree of global income and wealth inequality that has developed during the past several decades.
Piketty’s tax reform proposals would reduce income inequality to some degree, but unfortunately, it would be at the expense of all income groups, including the lower and middle classes.
He recommends a wealth tax of approximately 0.5 percent beginning at incomes of $260,000, 1 percent starting at $1.3 million and 2 percent from $6.5 million or higher. This tax would be applied to all forms of wealth, including nonfinancial assets such as real estate. In the U.S., net worth from real estate is approximately $13.9 trillion, or 17 percent of the $82.9 trillion total, according to the Federal Reserve.
In addition, Piketty proposes income tax rates of 50 percent starting at incomes of $200,000, which would gradually rise to as high as 80 percent at $500,000 or $1 million. While he has not been specific, he suggested these rates might apply to unearned income (interest, dividends and capital gains) as well as ordinary earned income (wages and salaries).
These proposed taxes are in addition to the existing federal taxes.
Typically, higher tax rates provide less incentive for individuals to work and invest. This tends to reduce wages, income and economic growth. Economists refer to this as dynamic scoring in their projections.
Using dynamic analysis, the wealth tax would lower capital formation by 16.5 percent, reduce wages by 5.2 percent, eliminate 1.1 million jobs and lower GDP by 6.1 percent ($1 trillion), while adding only $62.6 billion in tax revenue during a 10-year period. The after-tax income loss to the top 20 percent of the population would exceed 10 percent, while that for the remaining quintiles would be in the 7 to 9 percent range, according to the Tax Foundation.
The higher income tax rate on earned income would lower capital stock by 7.4 percent, cut 2.1 million jobs and reduce GDP by 3.5 percent ($575 billion), while increasing tax revenue by approximately $150 billion over 10 years. The bottom 90 percent would experience a 3 percent decline in after-tax income, while that for the top 1 percent would fall 21 percent. Including this tax rate on unearned income would magnify the damage by reducing capital stock by 42.3 percent, striking 4.9 million jobs and chopping GDP by 18.1 percent ($3 trillion), while reducing government revenue. This scenario implies a plummet of 16.8 percent in post-tax income for the lowest 90 percent and a 43.3 percent drop for the highest 1 percent, the Tax Foundation notes.
The combined effect of the wealth tax and higher income tax rates would be quite harmful to the economy. In addition, Piketty’s plan would further complicate the labyrinth we have for a tax code, thereby increasing the cost of compliance.
My tax proposal would eliminate all existing federal taxes and replace them with: 1) a consumption tax of 10 percent on all purchases above the federal poverty level, and 2) a 2 percent tax on liquid financial assets, such as equities, bonds and cash deposits, that excludes retirement, educational and philanthropic accounts.This would promote employment, investment and economic growth; lower income and wealth disparities; preserve the social safety net and purchasing power; balance the budget at current spending levels; significantly reduce compliance costs; and capture much of the underground economy where income goes unreported.
Unlike Piketty’s proposal, my plan excludes the taxation of real estate. This would increase investment, development and employment. More importantly, it would enhance financial liquidity, reduce price volatility and lower the likelihood of social disruption, since owners would not need to sell large quantities of illiquid assets quickly to pay the wealth tax in times of crisis.
There may be a better way to do tax reform.
© 2015 Newsmax Finance. All rights reserved.