While he acknowledges its diminishingly small probability of occurring, Thomas Piketty’s idea for a global wealth tax falls neatly out of his model wherein wealth accumulation amidst slow growth relentlessly leads to higher inequality.
Some have raised objections to the underlying model—it assumes, for example, that the wealthy save rather than spend much of their wealth—but in a piece in yesterday’s NYT, economist Greg Mankiw speaks in defense of allowing the wealthy to keep their wealth in the interest of the greater good.
With respect—I’ve found myself on a couple of panels with Greg recently and enjoyed mixing it up with him—I didn’t think he made much of a case. Some of his points—rich people care about their kids, people need to save to smooth consumption over tough times—are truisms that are not at all inconsistent with a wealth tax. For one, and I’ll get back to this in a moment, no one, including Piketty, is talking about a confiscatory tax on inheritances. Second, remember that Greg’s self-proclaimed topic is the well-being of the nation, not an individual rich household. It is easily arguable that the nation’s children and its families’ ability to consume in tough times can be improved, not diminished, by a progressive inheritance tax.
In fact, in an article based on nervousness over a wealth or inheritance tax—they’re not the same thing but their differences are not germane to what follows—there was a conspicuous lack of any discussion of such taxes in practice. As with any tax, the question is: given its magnitude and scope, what is its distortionary impact on behaviors relative to the benefits its revenues provide?
In the US case, the current estate tax—a tax on the value of estates at death—is tiny. As we point out here, because individuals and couples can exempt $5.25 million and $10.5 million, respectively, “fewer than 2 of every 1,000 estates will owe any estate tax in 2013.” In other words, “everybody dies, but only the richest 0.14% of estates pay the estate tax.”
Though the top statutory rate on estates is 40%, because of the exemption and other provisions that to reduce the liability of heirs to the estate, the effective rate—the average share of the estate paid in taxes—is about 16%.
The increased power and influence of the wealthy in politics have significantly weakened the estate tax in recent years. The Bush tax cuts in the early 2000s scheduled the expiration of the tax in 2010, but the fiscal cliff deal at the end of 2012 reinstated a weaker version of the tax, leading to a 10 year revenue loss of $370 billion compared to the pre-Bush parameters.
What about Greg’s argument that taxing wealth will rob the economy of savings that can be channeled into investments? That’s actually warmed over supply-side doctrine: give the rich a tax break and we’ll increase the amount of loanable funds, reducing interest rates, and boosting growth such that it will trickle down to all. Revealingly, Greg makes this argument through the productivity growth channel, evincing a lack of awareness that even if you believe his chain of events re savings, investment, and productivity, wages and productivity have gone their separate ways in recent decades.
Moreover, as CBPP reports:
A Congressional Research Service report found that the estate tax’s net impact on private saving is unclear — it causes some people to save more and others to save less — and that its overall impact on national saving, a critical determinant of the amount of capital available for private investment, is likely negative. “[I]f the only objective [of eliminating the estate tax] were increased savings,” the report concluded, “it would probably be more effective to simply keep the estate and gift tax and use the proceeds to reduce the national debt.”
In an era where spending cuts are most deeply threatening the part of the budget that supports the least well-off, and evermore accumulated wealth has increasing political influence, a moderate increase in the estate tax, as proposed in the President’s Budget, is thus smart policy both in fairness and fiscal terms. And that’s true regardless of whether r > g.