I've complained about Thomas Piketty's "Capital in the 21st Century" and I still think it's been vastly overpraised, but I don't go along with every criticism others have made. As a matter of fact, I think one idea that's been roundly dismissed by fans and critics alike deserves to be taken more seriously: the proposal for a global wealth tax.
From the left, James Galbraith of the University of Texas at Austin says the idea is futile: "Why spend an entire chapter on it -- unless perhaps to incite the naive?" Daniel Shuchman in the Wall Street Journal says it ignores the sources of prosperity: "He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation." Tim Worstall at Forbes says it's a logical impossibility. "Mr Piketty's focus on soaking the rich smacks of socialist ideology, not scholarship," says the Economist.
Piketty himself acknowledges that the tax is Utopian and -- as in the rest of book -- he spends no time interrogating his big conclusions or trying to improve them. But if you unpack the idea a little, it starts to look better. When it comes to feasibility, you might even claim that policy is moving this way.
On equity and efficiency grounds, it makes sense to tax wealth. The practicalities, though, are daunting. Flight to low-tax jurisdictions -- the rationale for making a wealth tax global -- is only one of many difficulties. To levy a tax each year, you'd need an annual accounting of wealth, which isn't easy to do, and you'd have to contend with the fact that wealth doesn't always produce a flow of income that can be used to pay what's owed.
The best way to tax wealth is therefore to tax capital income as it's realized and, once a lifetime, tax inheritance. Tax authorities generally pay lip-service to this concept, but they execute it badly.
In America, capital gains are taxed when realized, though at a preferential rate. More important, as Warren Buffett could tell you, investments can soar in value for decades without gains ever being realized or tax ever coming due. Incredibly, when those assets are passed to heirs, their value is re-based -- and the unrealized gains simply disappear for capital-gains-tax purposes. True, the estate is then supposedly taxed in its own right, but the wealthy can find ways around that too. The result is that enormous accumulations of income -- that is, wealth -- can escape tax altogether.
What's needed is moderate but effective taxation of capital income combined with moderate but effective taxation of inheritance, so that unrealized gains are brought back into the tax base, either during the course of an investor's life or at death. In the case of the very rich, attuned as they are to tax-avoidance opportunities, effectiveness does require international co-operation. But here's the thing: That part is already happening.
Bear in mind that the U.S. taxes its citizens wherever they live and work in the world. In that sense, the U.S. already collects a global income tax. In addition, in recent years, the U.S. authorities have been waging war on foreign tax shelters and bank-secrecy laws. In some ways, this campaign has gone too far: The rules have become burdensome for ordinary taxpayers who have ever lived or worked abroad. (Many Americans complain that foreign banks and financial companies no longer want them as clients -- too much record-keeping and reporting.) What's interesting, though, is just how far foreign jurisdictions have gone in accommodating U.S. demands for compliance with U.S. standards.
Plutocrats are mobile and can live and work where they please. They can hire teams of lawyers to advise them on domicile, residence, citizenship and any of a thousand factors that will affect their tax liabilities. Co-operation among tax authorities in closing loopholes is therefore necessary. But it's happening, and is likely to go further.
Piketty's nightmare of rule by oligarchs rests partly on his assumption that international tax competition will drive capital taxes to zero. In fact, greater co-operation among governments is already helping to ensure that the very rich pay their taxes. Combine this with reform at the national level to recapture unrealized capital gains for tax purposes and you could tax global wealth without ever needing a "global wealth tax."
Not quite as momentous as Piketty's overblown "central contradiction of capitalism" -- but on taxing wealth, he has a point.
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Corrects spelling of Thomas Piketty's name in headline.
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