Which inequalities matter and which taxes are appropriate?

by Kenneth Arrow on December 17, 2015

Professor Piketty and his colleagues at the Top Income Distribution
Study have put us all in great debt for the great increase in our
knowledge of historical development of inequalities in income and in
wealth in a number of leading countries.

Notice I have already mentioned two inequalities, income and wealth.
There is one more leading inequality which does not receive much
attention in Piketty’s work: consumption. Papers and books have already
appeared which try to measure this inequality. Many more inequalities,
e.g. health, educational achievement, race, and gender differences have
been the subject of study, but these are more specialized and less
central to economic analysis.

There is a strong argument for emphasizing consumption. Why, after all,
do we consider inequality in wealth, income, or consumption to be
undesirable? If we consider only economic arguments, it is because the
poor are being deprived of goods that are valuable to their lives,
exactly because they are more basic than the desires of the rich.

This has important implications for how we evaluate Piketty’s arguments
about inequality. It suggests an alternative metric of inequality, one
under which some of the problems that Piketty identifies are not, in
fact, problematic.

Consider a world, like that envisioned by Piketty, in which the rich
consume relatively little (compared with their property income). They
accumulate wealth by investing in industry, thereby increasing output in
the future. If they do not consume more in the future, but instead,
simply continue to accumulate, then the additional future output is
available for the consumption of the poor.

If, instead of being available to the poor, the additional output were
somehow reinvested in the productive sector, we would find a world in
which the ratio of investment to consumption is steadily rising. This is
not the world we live in, and would produce visible results contrary to
even casual observation.

In the neoclassical picture, consumption is the ultimate end of the
economy. The rich accumulate for ultimate consumption, perhaps of
generations in the far future, or, in some significant part, for
philanthropy. Piketty seems instead to have a picture of the economy as
a process of automatic accumulation, without regard to planned
consumption. Estates grow at the market rate of return (100% saving out
of property income). This is not a realistic account of how rich people
– or indeed anybody – treats their income. It also leads us to ignore
the politics of how this wealth is actually consumed.

Taking consumption seriously has important implications for measurement.
If we are truly concerned with inequality, we should be most concerned
with the distribution of consumption. The measurements we should look to
are measurements of inequality in consumption, since it is differences
in consumption that we really ought to care about.

This also has implications for policy: for example, if what we care
about is differences in consumption, we might consider a progressive tax
on total consumption of an individual. This would have to be done on an
annual basis, like the current income tax, not at point of sale. Such a
tax was long ago proposed by John Stuart Mill and later by Irving Fisher
and Nicholas Kaldor. Piketty refers to Kaldor’s work but does little to
refute it, saying only that no such tax exists. This is true, but of
course the progressive wealth tax favored by Piketty is equally untried
in practice.

We might be especially moved to consider a consumption tax if we
consider that Piketty’s proposed wealth tax seems in any case to be much
higher than it sounds. If we are to assume, say a 5% return on property,
then a 2% per annum tax on wealth would amount to about 40% of property
income. If investment is financed by property income, this implies a
very considerable reduction in investment. Is this desirable? One might
doubt it, especially since the effects on investment would be
substantial, even apart from incentive effects, which might also be
quite considerable.

Piketty, Meade and Predistribution

by Martin O'Neill on December 17, 2015

Thomas Piketty’s *Capital in the Twenty-First Century* presents a
troubling puzzle for social democrats and for parties of the
centre-left, as well as for academics interested in developing a more
egalitarian public policy agenda. Supported by a previously unimagined
wealth of statistical detail, gained through the archival labour over
many years of a large team of researchers, Piketty’s book confirms
profound concerns about the long-range dynamics of capitalism. Wealth
does not naturally disperse down to the many, but sticks to the few, and
especially to those who carry the arbitrary advantages of patrimonial
inheritance. The facts of inequality are devastating, and come with an
accompanying sense of deflation at the level of policy and political
action. We may have come to see the grim facts of capitalism’s internal
dynamics more clearly than ever before, but it is much less clear that
we have the tools to cure capitalism’s disfiguring disease of
accelerating inequality. Hence we see that a common reaction to
Piketty’s work on the left is one of resignation or even despair. The
sardonic good humour and cautious optimism displayed by Piketty himself
can seem oddly out of place against the background picture that has been
created by his years of ground-breaking research. [click to continue…]