Based on the themes of “Capital” I would argue that while there are provisions, such as the new brackets for businesses, Piketty would be in favor for, although still very debatable, he would still rate the new tax bill proposal as poor. I base my reasoning on his synopsis of his major results of the study (pg. 20). First, he shows the relationship of the reduction of inequalityG1 G2 or the rise of the middle class from 1910-1950 was “above all” a consequence of war with the “resurgence” of inequality after 1980 due to political shifts, primarily “in regard to taxation and finance.” To clarify, Piketty states, “The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result” (pg. 20). Thus, I would argue Piketty would not be in favor of the government passing a tax bill that has the potential of adding 1.5 trillion dollars in subsidized debt and would conclude that this is what he is referring to when he references the different actors viewing “what is just and what is not.” In other words, we are returning to a more historical point in time, where growth is low and return on capital overcomes return on labor and inequity will become extreme unless we change some of the details of our tax system. Second, Piketty shows the relationship between distribution and wealth and inequality by addressing, the inequality and distribution of income – primarily referencing labor income; and the distribution of wealth and wealth to income by referencing estate tax returns, inheritance, and the measure of the national wealth. In essence, he shows how the dynamics of wealth distribution move toward either convergence or divergence.G3 G4
Convergence is the decreasing of inequalities. The main causes of convergence are the diffusion of knowledge and investment in training and skills. Piketty notes that the law of supply and demand, as well as the mobility of capital and labor (which are variants of that law), may always move toward convergence, but he says that’s less than the main causes mentioned above when it comes to inequality. His reasoning is simple, putting effort into learning skills and being really good at them, increases productivity growth. For example, Piketty references the advances poor countries have made starting with China. They adoptedG5 the modes of production and acquired skills like the richer countries and in essence raised their national incomes. Another way Piketty shows this is that Europe and America’s share of global GDP increased due to the industrial revolution and colonization, so much that by 1910 the west controlled about 70-80% of world output. Yet, as development happened though, the output declined to 40%. It will most likely keep declining in places such as India and China has G6 had such meteoric economic advances. Again this shows that inequality is converging between the more poorer and richer nations.G7 “Regardless of what measure is used, the world clearly seems to have entered a phase in which rich and poor countries are converging in income” (67). This could potentially be an argument why the new tax bill proposal of lowering the business bracket could be good as this would allow businesses to pay their employees more and the income would increase. Later I will refute this with an argument from Piketty.G8 G9 G10 G11
Divergence is the increasing of inequalities. There are many causes or “forces” as Piketty states. One force is the fact that top earners can quickly separate themselves from the rest by a wide margin. The second force is much more detrimental as it is the act of accumulating and the concentration of wealth when the rate of return of capital is more than the growth which over a long period of time can have lasting effects.
Per the second paragraph of page 1, Piketty says, “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” (p.1)
First, Piketty explains that the second force of divergence mentioned above is a “fundamental inequality” where “r>g where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value is greater than g that stands for the rate of growth of the economy, the annual increase in income” (p. 25) is best explained from his data where he produces a mathematical law to explain what happens the ever-increasing accumulation of wealth on the part of the one percent is due to the simple fact that the rate of return on capital (r) always exceeds the rate of growth of income (g). Also, put, the rate of return on capital investment is greater than the growth of GDP. Thus, if the top percentile’s wealth is increasing faster than the economy is growing, than by necessity their share of total wealth will increase, along with wealth and income inequality.
“Income is a flow; it corresponds to the quantity of goods produced and distributed in a given period – typically a year. Capital is a stock; it corresponds to the total wealth owned at a given point in time. This stock comes from wealth appropriated or accumulated in all prior years combined” (p. 50). Similarly, the middle-class deals with income and the one percent deals with capital. G12
“The Law of Cumulative Growth holds that a low annual growth rate over a long period of time gives rise to considerable progress” (74).
“The Law of Cumulative returns is an annual rate of return of a few percent, compounded over several decades, automatically results in a very large increase in the initial capital, provided that a return is constantly reinvested” (75, 77).
As he writes, “the central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can, in the long run, have powerful and destabilizing effects on the structure and dynamics of social inequality” (77).G13 G14