Count off seven sabbaths of years — seven times seven years — so that the seven sabbaths of years amount to a period of forty-nine years. Consecrate the fiftieth year and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee for you; each one of you is to return to his family property and each to his own clan.
— Leviticus 25: 8, 10
Stephen Grenville has highlighted the latest burst of scholarship on economic inequality. Two recent tomes, Thomas Piketty's Capital and Anthony Atkinson's Inequality, attest that uneven distribution of income, and especially wealth, is the single biggest issue in modern political economy.
The essential problem is the conflict of two self-evident truths: that inequality is a necessary feature of capitalistic growth but gross inequality is bad for overall growth. Capital drives home another point which is similarly intuitive: at the root of inequality is the inheritance of 'unearned' (ie. undeserved) wealth, because returns on capital have been outstripping GDP and wage growth.
One of Piketty's recommendations is an annual 2% global wealth tax. As Grenville notes, such a prescription may appear 'unworldly.' It would be politically impossible to coordinate every jurisdiction internationally to agree to such a draconian measure. Several European countries do levy recurring wealth taxes, though not at levels as high as 2%. The policy would be kryptonite to many electorates, for whom income taxes are bad enough. In fact most advanced economies do enforce some sort of estate duty upon death, although inheritance-tax levels and loopholes vary a lot by country.
Rather than confiscating some or all of it at death, Piketty's formula aims to continually skim off 'excess' returns on capital. Piketty's thinking is that a 2% annual tax on assets should prevent the accumulation of outsized family fortunes and therefore inequality. Naturally, some would still get much richer than others, but the 2% yearly drain would ensure a reversion to 'normalised' wealth levels within a generation or two. There is an elegant (if ironic) symmetry between this modern French Marxist's annual 2% proposal and the surprisingly radical Biblical tradition of the Jubilee, in which lands and property are compulsorily returned to their original owners every fifty years.
Why 2%, or 50 years? In ancient times, when people worked virtually to their graves, fifty years was the very limit of human longevity. Piketty models an 'annual transmission flow of inheritance' which today at 2.5% of total private wealth shows capital piling up in a 40-year cycle, corresponding to inter-generational transfers. His book focuses a lot on the relationship between mortality and inherited capital. Indeed demographics drives an even more fundamental concept, the 'natural rate of interest', which is an equilibrium between net savers (basically, workers) and net spenders (kids and retirees). This rate is thought to be about 2-3% (after inflation) over the long run, and corresponds roughly to the inverse of human working careers (this makes sense when you think about it: if our lifespan were only ten years we would discount money steeply, while if we all lived and worked to 1000 we'd accept a gentler return on savings).
Therefore, what Piketty sees as the 'excess' return on capital is, more or less, the risk-free real interest rate. His tax would effectively confiscate riskless income. Some cultures disdain 'usury.' Islamic sukuk finance avoids interest entirely. Western capitalists argue that money must have a price, and seizing this yield removes the incentive for enterprise. That certainly might have been the case for the multi-generational family farm, which was the dominant business structure in the Jubilee era. But today it is hard to argue that William Jr will be demotivated from working if his trust fund is taxed harder. The two biggest agents in modern economies — the government and the public corporation — are impersonal, long-lived entities where equities (citizenship or shares, respectively) pass easily from one generation to the next. These institutions function no less effectively if their individual stakeholders are taxed progressively.
In an ideal world, we could afford to be relaxed about inter-generational transfers of wealth, confident that the inheritors of great estates will quickly fritter away their bequests, to be displaced by deserving new individuals. After all, only genes are truly heritable, and in the long run the most valuable form of capital endowed is human capital, not the financial sort. The problem though is that talent and money are no longer independent. As Chrystia Freeland has observed, the rich are spending big to make their offspring hyper-competitive.
It is hard to avoid the inevitability of redistributional taxation, particularly when financial liberalisation and loose monetary policies are a root cause of the problem. And when the tax system actively 'subsidises borrowing', further favouring those with access to cheap credit (ie. the rich), it is time for a fiscal rethink.
Not surprisingly, the one place where these issues come together aggressively is East Asia, and particularly China. Ageing, monetary expansion and financial repression could drive China towards an unprecedented 1000% private wealth/GDP ratio, according to Ajay Kapur, who has written extensively about 'plutonomy.' With an urban/rural chasm and educational arms-racing already in full effect, inequality will be widened further by China's regressive taxation system, where 'flow' taxes on everyday spending are high, income taxes lightly enforced, and property taxes non-existent. Chinese leaders will heed Piketty's warning. Redistribution can be done gradually. Or it will happen episodically, like the Jubilee, or in socialist revolution.
Photo by Flickr user Images Money.