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Sunday, May 25, 2014

Progressive Taxation principles and Piketty

Thomas Piketty wrote an extraordinary book called "Capital" which I didn't really appreciate until I started digging into it. His analysis accepted the definitions of those with wealth and power, and so when I first heard about the book I thought he was defending our current system. Doing this actually allowed him to skewer many of the myths and "zombie ideas" that have been driving progressive economists crazy for more than 30 years. It turns out he's teaching principles that I do believe in, just he's not coming at them by the expected route.

He's quoted in interview with PBS (see: here:

The Trouble with Property Taxes

Thomas Piketty:

“Right now, the taxation of property in the U.S. is proportional to your real estate property and doesn’t take into account your mortgage or your financial assets.”

In this dialogue they are discussing real estate taxation. The trouble with most of our taxes is that they fall on the middle class and poor as hard as on the rich, which in fact, is unjust. Our real estate taxation is regressive. Some of the reforms I've seen from the Georgist crowd, in my mind, would make the estate tax more regressive. This is why I started critiquing modern "Single Tax" advocates as advocating for something that claimed the letter but not the spirit of Henry George's LVT ideas. Some of them even advertise that this is a public good that will make real estate redevelopment more feasible -- rather than focusing on the single tax as supposed to be a taxed on unearned income from rents. [For more on this see Unearned Rent Post.

Paul Solman:

“It’s not how much equity you have in the house, it’s just how much the house is worth on the open market — you pay a percentage of that?”

Which winds up driving out widows, orphans, poor laborers, and the unemployed, into the streets.

Thomas Piketty:

“Right, so sometimes, actually, your mortgage is higher than your property value, so you have a negative net worth, but you’re still paying the same property tax. It’d be better to have a progressive tax on net wealth, so that, in effect, we would reduce the property tax for the bottom 90 percent of Americans.”

If the laborer can keep more income then we don't need higher minimum wages. If startups aren't burdened with high fees and taxes they can compete with larger established companies. Our small businesses might as well admit that the current sub-survival minimum wage are welfare for them and us adjust our tax system accordingly.

“We need to return to the type of progressive income taxation that we’ve had in the past, which did not kill U.S. economic growth. U.S. economic growth was actually higher before the 1980s than it has been since then.”

We need to return to a progressive income tax system that has integrity. Milton Friedman used to boast how he corrupted the IRS to protect the wealthy (he didn't put it that way but that's what is was). Our tax rates were designed to encourage certain behavior and embodied principles of "net" taxation (exemptions and loopholes) that allowed most businesses to shelter a lot of their income, but also encouraged them to reinvest in the economy. So it made them wealthy anyway, but at least it kept the money in the economy.

Paul Solman:

“Well, as you point out in the book, the top marginal tax rate in the United States was above 90 percent starting in the 1930s, all the way through until Kennedy in the early ’60s, and then it was still in the 70s all the way to 1980, right?”

It turns out the article doesn't touch Piketty's main points which talk about capital as a proxy for inherited wealth and the difficulty of touching inherited wealth and the inequality caused by disparities in income. And these high net taxes didn't really hurt anyone. The only tax that touched inherited wealth was the inheritance tax, and that kept wealth disparities down but didn't eliminate them. These taxes did prevent inflation in the income of the super-wealthy from millionaires to billionaires. That probably is why they funded the neo-liberal revolution I've talked about in relationship to the Mt. Pelarin conference, and the Reagan Revolution, which they funded as a counter-revolution led by Reagan, Stockman, Friedman and Laffer.

Thomas Piketty:

“You have inequality everywhere except in the growth statistics; the performance of the U.S. economy since 1980 has been 1.5 percent per capita GDP growth. If two-thirds or three-quarters of this growth goes to the top 1 percent, this is not a good deal for the rest of the population.”

Since that Reagan Counter Reformation the top .01% has become super-wealthy, the middle class has been shrinking and the poor have pretty much stayed where they were. We have refrigerators and TV's but compared to the rich have been falling behind.

Paul Solman:

“Well my friend, [former Ronald Reagan economist] Arthur Laffer, would say, look at the 1920s, when they dropped the top marginal rate to 25 percent. We had the roaring ’20s. Isn’t that a counter example?”

And this is where I have to really interject. The Roaring 20's was fueled by a massive swindle bubble with speculation in housing driving imaginary incomes and folks borrowing money based on those imaginary values. It collapsed in 1932 and that started the great depression for the wealthy. But that swindle bubble left out farmers, labor, and pretty much everyone but the slim middle class and wealthy out. So high taxes might have prevented the Great Depression. But you'll never hear that from Friedman or Laffer. They got paid to defend the interests of the rich and Laffer still does.

Thomas Piketty:

“This ’20s episode lasted for two years. Several decades of robust growth in the ’50s, ’60s and ’70s was not made impossible by progressive taxation. And this high progressive tax rate would only apply to enormously high incomes, like several million dollars. At this level of income, you are not really rewarding productivity of performance, you are rewarding greed or sometimes excessive risk-taking by the financial system, which is of no use for the real economy.”

Picketty is too diplomatic to talk about swindle bubbles.

Fact is that we need a return to progressive principles. Picketty is pointing to an important principle of just taxation here.

These principles of taxation are needed:

  1. All taxes should be net of income (after expenses) and net wealth unless they are fees for service.
  2. No taxes should take productive capital (assets), home or livelihood.
  3. Taxes should be progressive on the resulting margin.

And the best way to go after great wealth is to tax inheritances and large one time incomes under progressive principles too. People can either pay a progressive rate on the entire inheritance or treat it as a stream of income over a period of years and tax each year, but they shouldn't get away with 15% rates.

Read Reference article here:

Further reading on subjects:
The Target of progressive taxation and LVT is unearned land rents/income
Swindle Bubbles:
This battle is old and the logic is mostly settled:
Updated 1/19/2015, originally written 5/25/14

These posts are all linked.

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