French economist Thomas Piketty says we must rethink the political and ideological factors that have led to inequality.
UNSW Business School Professor of Economics Richard Holden recently sat down with Thomas Piketty, Professor of Economics at the School for Advanced Studies in the Social Sciences, Associate Chair at the Paris School of Economics, and co-director of the World Inequality Lab and the World Inequality Database, for an event hosted by the UNSW Centre for Ideas to explore the basis of inequality in our hyper-capitalist age and how to overcome it.
Excessive inequality, in any society, is harmful. Yet income inequality in Organisation for Economic Co-operation and Development (OECD) countries is at its highest level ever: the average income of the wealthiest 10 per cent of the population is about nine times that of the poorest 10 per cent across the OECD – up from seven times 25 years ago.
According to Prof. Piketty, political and ideological factors have bred the inequality we see today. But this doesn't mean that all ideologies are harmful; what it does mean is there are still several ideological problems society has yet to solve. To better understand this, economists need to embrace their roles as social scientists, because the relationship between individuals and societies inherently shapes modern economics.
"I view my work more as the work of a social scientist. It seems the boundaries between economics, history, political science and sociology are much less clear than what economists sometimes pretend, or historians sometimes pretend," said Prof. Piketty.
Global history teaches us what has worked (and what hasn’t) when it comes to the equal distribution of wealth. In the US during 1945, Prof. Piketty said the top income tax bracket hit an all-time high of 94 per cent for those making more than US$200,000 (A$263,190). The following year, the top rate was reduced to 91 per cent, and remained pretty much the same until the early 1960s. Importantly, this was one of the most successful eras in US economic history, said Prof. Piketty. During this time, the US middle class, economy and stock market boomed – all with a high marginal income tax rate over 90 per cent. This fact is often overlooked in debates about raising income tax for the wealthy.
"Progressive taxation, of course, is central, both through progressive taxation of income wealth and inherited wealth," said Prof. Piketty. He proposed taxing the wealthy at the highest rate of 80-90 per cent in his latest book.
In particular, he suggested learning from the history of US taxes between 1930 and 1980, taking away from history the things that worked, and fine tuning and improving the aspects where there was clearly room for improvement.
Equal education, workers’ rights in companies and public investment in research are also fundamental, Prof. Piketty added. He explained inequality is the result of ideology and policy choices, so there are still ideological issues that need to be resolved.
Finally, Prof. Holden noted that “some people argue that inequality is being driven by things like human capital''. But he suggested that maybe it’s not so much the movement of capital, but rather specific companies that are leveraging human capital over the entire world economy.
“So people like Elon Musk, Jeff Bezos, Mark Zuckerberg and the Google guys might be characterised as people who have had very good ideas that could be leveraged very widely over a large part of the US economy”.
And there is hope. In the US, Senator Elizabeth Warren, Congresswoman Pramila Jayapal, and Congressman Brendan Boyle recently proposed an "ultra-millionaire tax" on fortunes over US$50 million, which if passed, would bring in at least US$3 trillion in revenue over 10 years, without raising taxes for 99.95 per cent of US households.
Watch the full conversation here.