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Unequal reactions 

24 March 2014 By Edward Hadas

Rising income inequalities might well justify higher taxes on the rich. But the arguments need to be carefully marshalled. Thomas Piketty’s gloomy new book on capitalism ends with a call for more taxation of the wealthy. But outsized enthusiasm for “Capital in the Twenty-First Century” is unduly coloured by sympathy for the French academic’s political agenda.

Typical of those exalting Piketty’s treatise is inequality expert Branko Milanovic. Piketty, he says, has written “one of the watershed books in economic thinking.” Such praise is overdone. There is far too much of both old-fashioned growth theory, which ignores education, culture and the role of governments; and the discredited Marxist assumption that rich capitalists and poor labourers will inevitably clash.

Piketty is on to an important topic: what to do about the increased incomes of the rich, and he has made some helpful contributions to the global debate. Most significantly, he is one of the founders of the World Top Incomes Database, which provides much critical information. In the book, for instance, he uses the database to show that high pay packages are the main cause of the recent increase in income inequality in rich countries. That goes against his belief that capital ownership shapes income distribution in a society, since most senior executives only become very wealthy on the job. But Piketty’s theoretical loss of face is a gain for the political argument.

Excessive reliance on Piketty’s historical vision, however, will lead to losses for everyone. He all but ignores both the huge overall advance in prosperity in the last century and the societal benefits that come with a prosperous and property-owning middle class. He thinks a great deal about how governments have taxed the rich less in the last few decades, but pays almost no attention to how the authorities have helped the relatively poor.

Such gaps lead to a picture of the world that is barely recognisable. Sympathetic readers may be willing to overlook Piketty’s many blind spots. But their uncritical enthusiasm could easily make them look foolish. Ultimately, Piketty-worship will weaken the reasonable political case for pay restraint.

 

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