2. Piketty’s Proposal
• 0% on fortunes below 1mill euros
• 1% between 1 and 5 million euros
• 2% above 5 million (higher progressivity may be
desired)
• IMPORTANT; relies on the assumption there would
be the automatic sharing of banking data.
• 2 justifications;
1. To tackle the central contradiction of capitalism
2. European debt crisis.
3. ‘The Central Contradiction of
Capitalism’
• r>g ; a force for divergence
• Where r is the rate of return on capital (wealth) and g is
the growth rate of National Income.
• Wealth accumulated in the past grows faster than output
and wages.
• Especially important because r varies with the size of
initial stake and divergence on a global scale.
4.
5. The Dynanmics of Inheritence
• Annual Inheritance Flow (as a proportion of
national income)=
• Ratio of Average Wealth at death to Average
Wealth of Living
• Mortality rate
• Capital to Income Ratio
• http://piketty.pse.ens.fr/files/capital21c/en/pdf
/F11.11.pdf
6. What affects r>g?
• Size of Initial Stake
• Therefore, unequal rates of return
• Entrepreneurs easily turn into rentiers e.g. If top
1/1000th of income hierachy enjoy a 6% ror on
wealth whilst average wealth grows only at 2%,
after 30 years their share of global welath would
increase from 20 to 60%
• In general; Time Preference, precautionary
savings, life cycle effects, social and institutional
framework (e.g.pension schemes)
7.
8. Owners of Capital
• http://piketty.pse.ens.fr/files/capital21c/en/pdf
/T7.2.pdf
• http://piketty.pse.ens.fr/files/capital21c/en/pdf
/F8.4.pdf
• Two forces determining the importance of
capital in National income;
1. β=s/g ; a long term law
2. α=rxβ (α being share of capital income in
National income)
10. Main justification for the wealth tax
• Overall cumulated rents become more important
relative to hard work and skills, at the same time
the force for divergence r>g drives inequality
• Therefore a progressive tax on each individual’s
wealth is needed to halt the growth of the
highest fortunes until r g
11.
12. European debt Crisis
• To reduce EU debt by 20% would require;
1. Either 10% between 1 and 5 mill, and 20% on
>5mill
2. Or original idea over a period of 10 years 1%
between 1 and 5 and 2% on >5
3. Or 20 years of substantial primary
surpluses (budget deficits of 1%) with
2%GDP growth and 0% inflation
13. Conclusion
• A tax on Wealth is necessary to defeat the central
contradiction of capitalism and tackle the problem
of inequality
• Otherwise, in our low growth societies inheritence
eventually rules supreme despite there being no
‘common utility’ and has nothing to do with the
entrepreneurial spirit.
• Although it is important not to take this idea to
extremes- the creation of profits have been so
instrumental to development.
• Other attempts to deal with inequality may be futile.