Capital and Ideology (2019) by Thomas Piketty:
A synopsis of his concluding recommendations for reducing inequality
including related observations by Joseph Stiglitz and Anthony Atkinson
REDUCING AND CONTROLLING INEQUALITY:
Ways and Means
Obstacles and Opportunities
In the Short Term and over the Long Term
There continue to be a growing number of books examining the many problems associated with excessive economic inequality. These books have documented (a) an increasing prevalence and extremes of inequality, (b) different types and different aspects of inequality, and (c) the extensive social, economic, and political costs deriving from excessive inequality. However, until recently, very few of these books have offered much in the way of solutions or prescriptions for how excessive inequality might best be reduced and controlled.
Reducing inequality is a much more complex undertaking than simply instituting a few controversial tax policies. This is because inequality is not the simple result of simple causes. Moreover, solutions designed to reduce inequality always run the risk of creating unintended, unforeseeable, and complicating consequences, all deriving from the complex and inter-related economic, political, and cultural systems affected by those solutions. And of course, prescriptions for reducing inequality will always face intense opposition from those whose comforts and excessive privileges will appear threatened thereby. No book has yet made these points more effectively than has Thomas Piketty’s book Capital and Ideology. This book was first published in French in 2019, and then was translated into English in 2020 by Arthur Goldhammer. [In the paragraphs that follow, all page citations will be to Goldhammer’s translation of this book, published by the Belknap Press, a division of Harvard University Press.]
The first 16 chapters of Capital and Ideology (covering 965 pages) consist of a thorough historical overview of the complex political, legal, financial, and societal configurations that have operated in diverse nation states during various eras of history. Those eras were each characterized by increasing or decreasing degrees of social and financial inequality. In each nation and each historical era, a web of certain cultural assumptions, particular governmental structures and policies, various social organizations and economic power centers, all combined to facilitate either increasing or decreasing inequality. The combined effects of these various factors reflects what Piketty refers to as the ideology of each nation at that point in time. Every unique ideology creates or reflects a general sense of what is considered right, just, fair, and to be expected from those who live under its influence.
Piketty says of his “ideology” concept:
I use ‘ideology’ in a positive and constructive sense to refer to a set of a-priori plausible ideas and discourses describing how a society should be structured. An ideology has social, economic, and political dimensions. It is an attempt to respond to a broad set of questions concerning the desirable or ideal organization of society. [pg. 3]
Historically, predominant among the key features of each national ideology has been its views expressing or reflecting the proper roles to be played by the ownership of property, public and private, tangible and intangible, in that nation. These views determine who should be entitled to how much of that property, for how long, and under what circumstances. Each ideology concerning property thereby controls and justifies the amount of inequality that will be accepted or expected in each nation. Nor is the concept of “property” confined to tangible and concrete objects, such a land, buildings, vehicles, lakes or crops, i.e. all things that might normally be “owned.” “Property” also includes income, and “capital,” and items of sale value, such as stocks or bonds or mortgages. All such “property” contributes to what we might call total wealth. It is total wealth that tends to be the most unequally apportioned resource among all variables that have been recently examined. Moreover, there tends to be more inequality in total wealth than there is in any different and less tangible variable that one might measure, as for instance the inequality in the amount of annual carbon emissions produced by the different life-styles of each of the many citizens who live in a particular nation.
But the general concept of inequality, the multiple sources of which Piketty seeks to understand and describe, also happens to reflect a key aspect of a wider concept, one that Piketty subsumes under the overarching category of justice (i.e. fairness.) The injustices associated with particular forms of government, injustices that are permitted by the ideologies of particular nation states, are seen by Piketty as the most direct sources of instability in a society. They are also seen as the greatest impediments to any enduring control over inequality, because they also represent the greatest risks for causing serious social revolts.
A large portion of Piketty’s book is devoted to documenting the injustice that derives from unequal access to education, to health services, to legal and judicial services, and to the various levers of political power. Unequal access to these privileges is treated in some detail in Piketty’s book because these turn out to be major correlates with, and apparent sources of, marked inequalities in total wealth. Thus, before arriving at his concluding chapter, the chapter that outlines various ways and means for reducing excessive inequality, Piketty demonstrates again and again how much success in reducing inequality will also depend on removing various laws, policies, and conventions that currently impede equal access to good education, to health services, to legal justice, and to equal democratic representation in government. Piketty writes:
The history of all hitherto existing societies is the history of the struggle of ideologies and the quest for justice. In other words, ideas and ideologies count in history. Social position, as important as it is, is not enough to forge a theory of the just society, a theory of property, a theory of borders, a theory of taxes, of education, wages, or democracy. [pg. 1035]
Earlier, Piketty had explained:
In this book I have tried to present a reasoned history of inequality regimes, from early trifunctional and slave societies to modern hypercapitalist and post colonial ones. All human societies need to justify their inequalities. Their histories are organized around the ideologies they develop, to regulate by means of complex and changing institutional arrangements, social relations, property rights, and borders. [pg. 966]
In the pages that follow I will examine Piketty’s recommendations for a national ideology and the corresponding governmental policies that he feels may be best designed both for limiting inequality and for producing a truly Just Society. The society he seeks will also be one that can change and evolve as the times require, and thus it can endure. These are the themes that are addressed in Chapter 17 of Piketty’s book Capital and Ideology, a chapter to which he has given the title: Elements for a Participatory Socialism for the Twenty-First Century.
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To begin Chapter 17, Piketty stresses that solutions to the problems created by excessive social and financial inequalities will always require political experimentation supported by social mobilization for continued changes that seem to promise increasing social justice. He stresses that his own observations, and those of all others, must be informed by historical data, but also tempered by open and transparent public dialogue. Ideologies cannot be changed easily or peacefully without considerable public education and pressure. For Piketty, historically, that pressure generally seems to start with a crisis, a crisis that comes from a swelling demand for justice. He writes:
What is a just society? For the purposes of this book, I propose the following imperfect definition. A just society is one that allows all of its members access to the widest possible range of fundamental goods. Fundamental goods include education, health, the right to vote, and more generally to participate as fully as possible in the various forms of social, cultural, economic, civic, and political life. [pp. 967-68]
Piketty suggests that the closest modern approach to a just society is to be found in those nations that currently exemplify “the democratic socialist tradition.” These nations are best illustrated by post-war (and post-communist) Germany, and by the Nordic democracies. They illustrate for him the important success governments can have in “transcending private ownership and involving workers and their representatives in corporate governance.” [pg. 969] Piketty prefers to use the term “participatory socialism” to describe these governmental policies, so as to emphasize the key goal of democratic participation in corporate organization, with it’s corresponding decentralization of corporate governance, including a minimum of state control. In this context too, Piketty calls attention to a key role for an accessible education system to support participatory socialism, as well as an emphasis on “temporary ownership” of all things, with a highly progressive schedule of taxation for those who currently enjoy considerably more of those things than does the average person.
Piketty closes his introduction to Chapter 17 with the words:
Justice must always be conceived as the result of ongoing collective deliberation. No book and no single human being can ever define the ideal property regime, the perfect voting system, or the miraculous tax schedule. Progress toward justice can occur only as the result of a vast collective experiment. …The elements I will explore [below] are meant merely to indicate the possible paths for experimentation, derived from analysis of the histories recounted in the preceding chapters. [pg. 971]
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Piketty then begins discussing the necessity to transcend modern capitalism. Existing capitalism is based on an ideology that prioritizes the sanctity and absolute protection of private property, a view that Piketty has labeled “proprietarianism.” Modern capitalism has evolved to the point where economic power has become concentrated in the hands of a very few, very wealthy, people. Yet in a few select places, modifications have been made to current capitalist ideology. These modifications have successfully reduced the absolute nature of some earlier property rights. For instance, certain laws have given renters some protections against eviction. And renters have been given legal rights to become owners of their rented properties, under specified conditions. Then too, in certain countries corporate employees have been given rights to have seats and votes on the Board of Directors and (rarely) to participate as stockholders of the companies they work for, taking on some share of the “ownership” of these companies. The results of such policies have been associated with an important reduction of inequality in these countries, with better wages for workers, and more productivity for corporations.
Tax laws have also been used successfully in some countries to modify the markedly unequal ownership of income and wealth. Thus, Piketty also advocates a more relaxed capitalist ideology, one that makes the “ownership” of property more like a temporary loan, the length and terms for which are restricted in ways that can give more people more access to that same form of property. Progressive income taxes, and wealth taxes, can help to accomplish this, with steeply higher tax rates for those who enjoy many multiples more than the average amount of income or wealth. In some countries, where inequality has been kept historically low, these top income tax rates have ranged well above 75%. These two arenas: corporate organization and regulation on the one hand, and wealth distribution and taxation policies on the other hand, are what Piketty then discusses in greater detail.
Social ownership of business firms began to flourish in northern Europe right after World War II, in defeated Germany, and to a lesser degree in Sweden, in Norway, and Finland. A new constitution was written for Germany in 1949 with strong input from labour unions and civil-liberties groups. Community property rights were added to private property rights. The German constitution enabled worker representatives to gain the right to hold up to 50% of the seats on corporate Boards of Directors. (In Sweden it was 33% of the seats.) These “co-management” arrangements have proven to be a great success. Piketty reports that these arrangements have:
… helped the Germanic and Nordic countries to develop an economic and social model that is more productive and less inegalitarian than other models. It should therefore be adopted without delay in other countries . . . with half the board seats in all private firms, large and small, given to workers. [pg. 973]
Piketty notes that in most countries Constitutional guarantees (amendments) will almost certainly need to be in place before such modified corporate structures can be effective and endure. In a footnote on the same page (above) he notes that rather than a formal board of directors for a firm, it may be sufficient to have “a simple oversight committee or management council.” These modified forms of corporate structure can help shift the management emphasis from seeking short-term stockholder and management benefits, to prioritizing long-term corporate endurance and the continuance of fair wage-paying jobs.
Piketty then notes certain limitations with existing co-management structures, limitations that he feels need improvement. One such improvement would be to allow workers to become shareholders in a firm, thereby adding slightly but importantly to their individual voting powers. Another improvement would be to modify somewhat the rules that currently link the number of shareholder votes to the amount of capital the shareholder has invested. He suggests there should be a ceiling on the number or proportion of votes that any shareholder can hold in a large corporation. And public service corporations (for instance media firms) and non-profit corporations (for instance universities or certain NGOs) should make allowances for public input in their corporate decision making. Piketty points out that many current foundations function very well without shareholders. He ends his brief discussion of corporate governance saying “What is certain is that there are many ways to improve on co-management . . . so that social ownership and corporate power sharing can contribute to the goal of transcending capitalism.” [pg. 975]
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At this point Piketty is ready to turn his discussion to taxation policies as a key means for reducing excessive inequality. He will advocate for three types of federal or national taxes: taxes on income; taxes on total wealth and property; and, taxes on estates at death (an inheritance tax.) Each type of tax is to be highly progressive, ranging from zero (or near zero) percent when the amount being taxed is below the population average for that form of wealth, up to 90% or higher when the wealth being considered exceeds ten thousand times the population average. The revenue from these taxes would then be redistributed in a fashion intended to further reduce wealth inequality in a manner that he will address a little later.
Throughout his book, Piketty has measured “inequality” in terms of the disparities seen among three specific groups in each of the populations that are under discussion. He rank-orders every member of each population, from those possessing the least amount of some resource to those possessing the greatest amount of that resource (e.g. from the poorest individual to the wealthiest). The first of his three groups always consists of the least fortunate 50% of the population. The second group always consists of the next more-fortunate 40% of the population (i.e. from those who fall between the 50th percentile and the 90th percentile of the population). His third group consists of the most fortunate 10% of the population.
There will always be some degree of variability and inequality in the distribution of any resource. Thus, mathematically, the top 10% must always collectively possess rather more than 10% of the total resource (sometimes 70% or more of, for instance, the total individual wealth) while the bottom 50%, collectively, will invariably possess less than 50% of the total resource (often only 10% or less of the total wealth.) Allowing for this mathematical necessity, by choosing the different sizes of these three groups, Piketty seems to be subtly suggesting that an “ideal” degree of modest inequality might be to arrange for something very close to one third of all total wealth to be distributed among each one of these three groups.
Piketty points out that in 1910, the wealthiest ten percent living in developed European nations, and also in the US, collectively possessed between 80 and 90 percent of their nation’s total wealth. [Moreover, within just that top 10%, more than 70% of their total wealth was concentrated in the hands of their own top 10%, i.e. it was owned by wealthiest one percent overall.] In these same countries, a century later in 2010, the corresponding amount owned by the wealthiest 10% (although it had been increasing noticeably again since 1980) had been reduced from the earlier 80 to 90 percent and now stood at between 50 and 60 percent of the total national wealth. During that intervening century, almost all of the wealth removed from the top 10% was picked up by the next (middle) 40% of the nation. The poorest 50% in each nation originally possessed (and 100 years later still only possessed) between 5 and 10 percent of their nation’s total wealth. Although inequality had been somewhat reduced, nothing had improved for the poorest half of those living in each nation.
Piketty seeks a better way to reduce inequality, with an emphasis on a method of redistribution of national wealth that will prove much more helpful to that least wealthy half of the population. Progressive taxation alone appears to shrink the combined wealth of the top 10%, somewhat reducing inequality, but so far it has not reduced inequality by increasing the wealth of those among the poorest half of the population. A return to progressive rates of taxation is thus an important first step in reducing inequality, but more importantly it can help to provide the funds that will be needed for experimenting with new policies designed to lift most of the poorest people out of poverty.
* * *
Piketty begins his discussion of income tax policies with the observation that inequality was markedly reduced following the two world wars. In earlier chapters of his book he noted that the combined effects of the wartime destruction of buildings and all manner of assets, plus the heavy taxation needed to pay for rebuilding and for war debts, had the effect of markedly reducing the wealth of the ultra-rich, and so it reduced inequality in general. By 1945, and continuing on until 1980, inequality remained generally constant or even gradually declined somewhat further. Yet during that same period economic growth rose to unprecedented levels. This trend existed not withstanding continuing highly progressive income tax rates, imposed after the war. Piketty stresses:
Whatever the wealthy of the Belle Époque (1880—1914) may have thought to the contrary, extreme inequality was not the necessary price of prosperity and industrial development. Indeed, all signs are that excessive concentration of wealth exacerbated social and nationalist tensions while blocking the [later] social and educational investments that made the more [equitable] postwar development model possible. [pg. 976]
Piketty then goes on to stress that following 1980 tax and economic policy changes, reducing income taxes and increasing tax loopholes, particularly in the USA but also in Russia, India, and China, produced a rapid return to the high levels of national inequality the world had seen before 1914. Piketty stresses that this provides an important warning about how easily extreme wealth inequality can reconstitute itself, and it can do that in many different ways. Privatization of government services is but one example of how public property has been turned back into private property, increasing inequality while it concentrated wealth in fewer hands.
Piketty also notes that for many of the most wealthy people in a nation, most of the growth in their wealth does not come in the form of taxable income. Often it comes from growth in family holdings and financial instruments that are a form of silent capital, forms that do not count as “income.” When or if those increases are taxed, they are generally taxed at a much lower rate than is “income.” So Piketty argues that total wealth itself needs to be taxed, carefully, but progressively. He points out that for the wealthy, “income” is more easily disguised as something else, and thus avoided. Yet in many respects “wealth” can be more effectively assessed than can income, and it can be taxed at a lower and more acceptable rate than income. Many countries already employ “property taxes,” for municipal or non-federal districts, and these yearly taxes, for most taxpayers, fall well below 1.5% of the assessed “wealth” that is being taxed. By contrast, effective income taxes, which are generally the source of much greater taxpayer anxiety and opposition, often are taxed at well over 10% of the taxable income to which they apply.
Property (or wealth) taxes are generally “flat” however, that is they are a fixed percentage of the assessed value of the total property. The very rich and the very poor thus have the same proportion of their wealth extracted by the tax. But that proportion is harder to bear for the poor, and much easier to bear by the very wealthy. It restricts to a much greater degree the funds that the poor have available to spend for other basic necessities than the wealthy are restricted by returning the same proportion of their wealth to the government. Thus, it is Piketty’s view that wealth taxes could and should also be progressive in nature, not flat, with the wealthy paying somewhat more according to their means, and the poor paying somewhat less than otherwise they would.
* * *
It is at this point that Piketty introduces, for initial discussion and evaluation, his provisional taxation recommendations, including some general and illustrative tax rates that might be appropriate and could prove to be sustainable. This is all signaled and summarized in Table 17.1 appearing on page 982, a table bearing the title Circulation of Property and Progressive Taxation.
Piketty has already hinted at, but hasn’t yet described in any detail, his intended recommendations for a “universal basic income” plan, and a “universal capital endowment” plan, as well as a universal health plan, and a universal pension plan. These plans will all play key roles for achieving an effective redistribution of wealth, one that will dramatically improve the share of all wealth received by everyone whose total wealth is below the national average. Thus these plans would dramatically reduce wealth inequality. Moreover, they would greatly facilitate parallel efforts to democratize society. In turn, those various accomplishments should greatly lower threats of future social unrest, or a resurgence of excessive inequality.
Over many of the remaining pages in this chapter Piketty describes these plans and their associated costs. He quantifies these costs in terms of their proportion of the “total national income” [but sometimes this means the GDP.] The bulk of the necessary revenues to pay for these policies will come from annual income and wealth taxes, plus estate taxes at death. There will, however, still be other taxes for dedicated benefit plans, such as taxes on wages to fund unemployment insurance, or taxes on carbon emissions to fund carbon reduction plans.
The universal basic income plan is much like a life-long pension, and it generally would be paid monthly. It is “universal” in the sense that every adult receives it, always. It is income eligible for yearly taxation, like other income is. For the very wealthy it is all returned to the government in yearly taxes. For the very poor, depending on the minimum tax threshold set, none of it is taxed. For Piketty, however, the Basic Income plan is not meant to be the sufficient nor even the primary means for lowering inequality by increasing the income of those who lack it. Nor is it meant to cover every basic necessity of life.
The universal capital endowment is a one-time endowment of “capital,” a kind of governmental bequest or inheritance, to be received near the beginning of one’s adult career (Piketty suggests at age 25) and he sees it amounting to perhaps 60% of the average adult wealth in the nation. (Piketty has chosen this amount based on the mathematics of current typical demographics, and on his suggested taxation levels for annual wealth and estates at death, as outlined in footnote 30, page 983, and as elaborated some on his following pages.) Sixty percent of average adult wealth, in developed western democracies, currently amounts to between 3 and 3.5 times the average annual income of all adults in those nations. With this one-time capital endowment (tax free as income, yet almost certainly subject to wealth taxation in future years) the young adult can start a career or family home or personal business or advanced education etc, as the adult may choose.
That said, Table 17.1 represents the core element of Piketty’s recommendations for reducing and maintaining low and economically favourable levels of financial and social inequality. To finance the one-time capital endowment for each young adult, it relies on two forms of wealth taxation: an annual tax of total wealth (the “property” tax), and a one-time estate tax at death (the “inheritance” tax). To finance the basic income plan as well as the social support programs of universal health care, public education, unemployment insurance, old-age pensions, and requirements for maintaining social infrastructure and necessary ecology, Piketty relies on the annual income tax and the nation’s other taxes, e.g. on sales of some items, on productions of pollutants, or on imports, etc.
The two wealth taxes and the income tax are each set at progressively increasing rates as a function of their relationship to the average personal wealth and the average annual income values in each case. In Table 17.1 Piketty’s initial (suggested) choices for effective tax rates are as follows:
PIKETTY’S PROPOSED TAX ASSESSMENTS
Multiple of the national Average: 0.5 2.0 5.0 10 100 1,000 10,000
% Property Tax (wealth total): 0.1 1.0 2.0 5.0 10.0 60 90
% Inheritance Tax (estate total): 5.0 20 50 60 70 80 90
% Annual Income Tax: 10.0 40 50 60 70 80 90
It should be noted here that Piketty is not advocating for seven discrete tax brackets. All his progressive tax rates appear to be located on continuous monotonic-increasing curves, only seven discrete points from which appear in Table 17.1 for illustration purposes. Piketty does not point out, but a reader should also be aware, that the three national averages that are relevant in the above table will represent currency values well in excess of the more “typical,” median currency value that would apply to a person at the 50th percentile, i.e. at the centre of the ranked distribution of each variable. The presence of ultra-wealthy individuals in the population disproportionately “pulls” the monetary average up noticeably higher. The person of average yearly income in your nation is likely to earn as much as 40% more than an individual at the median income, putting him or her well into Piketty’s middle 40% group of the population. The lowest yearly income earned by someone just falling into the highest 10% of the population (just beyond the 90th percentile) would likely lie very close to two times the average income of all the individuals in the nation. A median income (at the 50th percentile) would often yield a “multiple of the nation’s average income” amounting to approximately 0.70.
The capital endowment concept and the basic income concept are not new, but Piketty gives them a newly detailed examination and further realistic support in chapter 17. He has been the first to forcefully advocate for implementing both policies together. Others have previously advocated for adopting a basic income policy, and that has been tried in a few short-term, small-scale studies. But the concept of a capital endowment policy has never been seriously examined to the degree that Piketty has done. Anthony Atkinson (to be discussed later, below) summarized and renewed this idea in his 2015 book Inequality: What Can be Done? Piketty credits Atkinson for bringing renewed attention to the concept of a universal capital endowment. Piketty writes:
The principle novelty of my proposal is to use the proceeds of both an inheritance tax and an annual property [wealth] tax to pay for the capital endowment; this would make much larger endowments possible and ensure permanent circulation of wealth. Note that the sums I am proposing to mobilize to finance the capital endowment are substantial (5 percent of national income) and would entail a significant increase of both the property and inheritance taxes for the wealthiest individuals. Still this is a small amount compared with the total tax bill (here set at 50 percent of national income.)
. . . In my view this system should be used together with the new rules for power sharing on corporate boards, and caps on the influence of large shareholders, which I discussed earlier. That way the diffusion and rejuvenation of wealth will have an even greater effect on the distribution of economic power. [pp. 984 – 85]
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Piketty then gives a more detailed accounting of the necessary tax revenues to support the costs of implementing his trial recommendations. During this discussion he has more to say about the unfortunately regressive wealth taxes that are currently in use. These taxes exclude those on financial assets, which constitute the bulk of most large fortunes. Moreover, they make no allowance for the debt that may be owed by persons of modest wealth on the property the value of which is being taxed (e.g. debts in the form of mortgages on land and buildings or, debts on vehicles.) Piketty advocates comprehensive wealth assessments (and the policy changes needed to make them) that include as much of wealth as possible, but always net of debt. He emphasizes the very modest tax rates that would be appropriate for wealth that is assessed at less than twice the population average, and rates that would be essentially zero for those whose wealth is less than half the average.
Piketty concludes this section of chapter 17 with the words:
Note, finally, …it is essential that the progressive property and inheritance taxes … apply to overall wealth—that is, the total value of real estate and business and financial assets (net of debt) held or received by a given individual, without exception. Similarly the progressive income tax should apply to total income, including income from both labor (wages, pensions, non-wage income, etc.) and capital (dividends, interest, profits, rents, etc.). History shows that if different types of assets and different forms of income are not treated identically by the tax code, taxpayers will respond by optimizing, creating a sense of injustice that can undermine the system, not only technically but also by making it less democratically acceptable. [pp. 988-99]
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Because currently wealth can still be hidden offshore under differing national rules, Piketty recognizes that international agreements designed to insure much greater fiscal and corporate transparency will be needed to facilitate the optimal implementation of his policies by any one nation. Still, he suggests that individual nations can go a long way toward implementing the policies he advocates, and these policies can greatly reduce the inequality currently destabilizing the economies and the governments of those nations. He notes also that individual nations can apply (and have recently applied) effective pressure on foreign banks who would not share information about foreign accounts, by applying strict sanctions on the branches of such banks that operate in their country. In many nations the tax laws apply to all their citizens, no matter where they may reside outside the country. There will need to be adequate funds assured for audits, and for enforcements of tax law. Moreover, those funds will need careful protection from subsequent erosion. Every nation can and should take more effective steps to insure transparency about the full and true identity of owners of wealth in that country
Piketty then discusses the reasons why it might be necessary to write laws into the nation’s constitution, laws that will protect policies promoting economic justice. As currently framed, many constitutions protect private property at the expense of community property and social justice. And they permit legal attacks on progressive tax rates to be portrayed as being a form of “unequal” tax treatment. Piketty uses a footnote to suggest a general first draft of a brief constitutional declaration to finesse such legal challenges. It reads:
The law sets the conditions of ownership and seeks to encourage the diffusion of property if need be through a system of progressive taxation of wealth coupled with capital endowments. In general the tax should be apportioned among all citizens in proportion to their ability to pay. If one expresses the amount of tax actually paid as a proportion of property owned or income received by each citizen, that proportion may not be smaller for wealthier citizens than poorer ones. [footnote 68, page 996]
Piketty next clarifies the role of income taxation to pay for his welfare state proposals. For him, social security taxes and various payroll and self employment taxes amount to income taxation as currently constituted. These revenues almost always go straight into dedicated funds from which health insurance, unemployment insurance, pensions, etc. are paid. Piketty argues that this practice should be the norm for income tax revenues of every sort. Taxpayers need to know how this tax money is spent, with fully transparent public accounting for it. Only then can support for progressive taxation be maintained. Piketty also takes up the question of indirect income taxes, particularly those that take the form of sales taxes on goods and services. These taxes are borne disproportionally by the least wealthy individuals in each nation. They are “flat” taxes and they share all the inequities he noted earlier with non-progressive property taxes. With a few exceptions, Piketty suggests that these taxes should be omitted and instead folded into the annual income tax.
The basic income and capital endowment policies are then given further attention by Piketty. He notes that already there are a few non-universal basic income plans in place in certain Western European countries, but he adds:
Basic income systems can and should be improved, specifically by making them more automatic and universal, especially for the homeless, many of whom face great difficulty in obtaining access to the basic income, housing, and, more generally, the help they need to find work and a secure place for themselves in society. It is also essential to extend the [existing] basic income [policies] to people earning very low wages.… [pg. 1002]
But again, Piketty emphasizes that a basic income is not sufficient. He continues:
The goal should be to transform the entire distribution of income and wealth, and beyond that, the distribution of power and opportunities; it goes far beyond just setting a floor on income. The ambition must be to create a society based on [a] just remuneration of labor—in other words a just wage. The basic income can contribute to that goal by raising the income of individuals who are otherwise poorly paid. More than that, however, justice also requires a thorough reconsideration of a whole range of mutually complementary institutional arrangements. [pg. 1003]
This leads Piketty into a consideration of each one of these multiple complementary institutional, social, and political arrangements, beginning with access to educational advancement. But first he undertakes one final brief discussion about a special case of taxation; in particular, the taxation of carbon emissions.
* * *
In Piketty’s view, there have been two major threats to political and economic stability and endurance over the years. [He was writing at a time prior to the arrival of a third threat in the form of a serious world pandemic.] These two threats have come from excessive inequality and from human-caused climate change. Meeting the threat of climate change will require, among other things, lowering carbon emissions as much as possible. And doing that will require government planning and policies that may require additional taxation to pay for their implementation and to incentivize their success.
For Piketty, there is a close relationship between the high levels of carbon emissions and the degree of financial inequality in society. It is the very wealthy who are the greatest consumers of fossil fuels and who are thus disproportionately the contributors of carbon dioxide (and associated greenhouse gas) emissions in the atmosphere. Piketty argues that a carbon tax, by itself, is unlikely to succeed in reducing emissions, for the same reasons that other flat taxes fail to control financial inequality. Flat taxes place a disproportionate burden on those of low income, and are seen as unfair in that respect. The wealthy can continue to travel widely whatever the higher cost, while the rest of society is compromised and discomfited. To be seen as fair, carbon taxation needs to be progressive in relation to the wealth of those to whom it applies.
Piketty considers a few ways that a progressive taxation for carbon emissions might be achieved. For simplicity he favors integrating any carbon tax into the annual income tax, in a fashion that can incentivize users to switch to lower-carbon fuel consumption. But to do this most fairly would require what amounts to a system for rationing high consumption, one that Piketty suggests might possibly be facilitated via something akin to requiring special credit-card payments for travel, and monitoring of personal consumption. Piketty also cautions about potential destabilizing and inequality-increasing effects if the sale of one’s personal carbon ration to someone else is allowed. In general, Piketty emphasizes:
It is hard to see why the lower and middle classes in the rich countries would be willing to make a major effort to curtail emissions if they feel that the upper class is free to go on living and emitting greenhouse gases as before.
…The carbon tax must not be seen as the only approach to dealing with the problem. Often the most effective way to reduce emissions is to establish norms; prohibit certain practices; and agree on strict standards for automobile emissions, heating equipment, building insulation, and so on. In many cases these are more effective choices than just placing a high tax on carbon. [pg. 1005]
* * *
It is at this point that Piketty turns his attention to “Constructing a Norm of Educational Justice.” Education is portrayed as a key factor for maintaining effective democratic governments, and participatory socialism in particular. But educational justice requires equal access to good education for all, at any age. Piketty’s research documents that social class and financial status currently determine who receives access to the best and most advanced education in most developed countries. While both state and private schools pay lip service to providing equal educational opportunity for students of equal merit and ability, the means for identifying and encouraging these virtues generally are highly opaque, highly arbitrary, and unequal in their outcomes.
Educational spending in state schools highly favors the schools in socially advantaged neighborhoods. Teachers in those schools receive consistently higher pay and better teaching environments in which to work. Piketty urges much more transparent data on the funding provided to every school. He urges that clear policies be put in place for determining that funding. Particularly among universities, there is essentially no transparency at all concerning the criteria that actually determine offers of admission, let alone the determinations of the financial aid that is awarded. Spending on education is unequal in another respect: currently the least amount of spending (per pupil) is at the elementary school level, while the greatest amount of spending is for post-secondary education. But the greatest number of students, whose education appears to be in its most critical period, are the elementary and secondary school students whose teachers invariably earn less than do others.
Piketty proposes two goals for educational policies in the near future. He writes:
First, average teacher pay should no longer be an increasing function of the percentage of better off students in the schools, and second, the amounts invested in the least advantaged primary and secondary schools should be substantially increased to make the overall distribution of educational investment by age cohort more equal. These changes …need to be publicly verifiable. …All studies show that early intervention, particularly in primary and middle school, is the best way to correct scholastic inequality between students of different backgrounds. [pg 1013]
Throughout his discussion of educational policies under participatory socialism, Piketty stresses over and over the need to assure full transparency of the administration of those fiscal and educational and social policies that the government (and educational institutions) are committed to upholding. Major educational changes (experimental as these will often have to be) must win continuing support from a public that has played a major role in their design.
Before leaving this topic Piketty also speaks about the problems created in nations that have large private universities (and preparatory schools) with very large endowments that enable them to support a superior educational infrastructure and faculty. This current fact of life will tend to perpetuate an elite educational oligarchy [my phrase, not Piketty’s] an elite that may require special attention. Piketty considers rules for regulating the spending of endowment income, including perhaps some sharing of it, or government taxation of some of it.
* * *
Piketty has spent most of his entire book examining the links between the forms of government and the degree of inequality that those forms facilitate. Piketty warns that there can be no effective control over inequality without a more democratic and participatory socialism of the kind that he has been advocating. Widespread access to voting, and policies that prevent the wealthy from exercising disproportional influence on elections, continue to be absent in most “democracies.” As Piketty had previously noted in connection with labor policies and taxation policies, the changes needed to ensure the forms of justice provided by participatory socialism will likely require constitutional protection. In this connection, Piketty warns: To shrink from changing the rules because it is too complicated is to ignore the lessons of history and [to] forgo any possibility of real change. [pg. 1017]
It is the rules governing the financing of political campaigns that Piketty views as needing the most urgent attention and organized control. Associated with these rules is the need for a more participatory, citizen controlled, non-profit, but tax-assisted media, offering greater independence from control by wealthy financiers and stockholders. These media organizations should include not only television and radio and newspapers, but also digital media, with legal controls to combat sponsored content and unlimited advertising. Piketty and his wife, Julia Cagé, suggest that political parties (and candidates) could be financed in part by “vouchers” that the government would issue to each taxpayer, vouchers that he or she can assign to help finance a political campaign in the next election. They urge that campaign contributions and spending should have strict limits. And full public transparency must be observed. Corporate funding of any election activity should be prohibited. Piketty points out that in many European countries today corporate political donations are already prohibited. And finally, political party rules and procedures must also be made fully transparent at all times.
Piketty next questions the fairness of tax deductions for large political donations. Such a policy gives great advantage to the most wealthy. He advocates removal of all tax deductions for all political donations, and their replacement with the limited vouchers mentioned above. For the same reasons, Cagé has recommended that all charitable donations cease to bring tax deductions, and that instead charitable vouchers be issued and assigned by individuals to guide a basic governmental support for charitable groups, in addition to which discretionary private donations could still be made. The aim is to give the less wealthy greater say in “charitable” allocations (which may include funding for health groups, cultural groups, groups fighting poverty, providing education, and even media groups.)
* * *
Piketty introduces his next topic with the words: We come now to what is undoubtedly the most delicate question in defining the just society: the question of just borders. [pg. 1022] While current ideologies generally encourage the free movement of goods, services, and capital across borders, at the same time they strictly limit fiscal, social, and legal policies from crossing borders. Piketty argues that this could and should change. With care, and trust-building between nation states, “co-development treaties” could be designed. Piketty notes that:
One of the most obvious contradictions of the current system is that the free circulation of goods and capital is organized in such a way that it significantly limits the ability of states to choose their fiscal and social policies. …International rules do not establish the neutral framework they purport to create but rather compel countries to adopt certain policies, and directly restrict national sovereignty. [pp. 1022 – 23]
Piketty looks at current support for, and suspicions about, certain international efforts to better the lives of all. He notes the willingness of governments to join in international efforts to limit climate change, but their unwillingness to agree to common tax policies that would help achieve such limitations. Similarly, the limits set on migration across borders, be they from tourism, immigration, or the flights of refugees, generally serve the preservation of inequality and bolster resistance to the state policies that might reduce that inequality, locally and/or globally. Piketty concludes:
In sum, ideas of justice are important at the transnational as well as the national level in regard to developmental aid, the environment, and free circulation of persons, but those ideas are often confused and contradictory. The important point is that they are not set in stone: they are historically and politically constructed. [pg. 1025]
* * *
In the remainder of Chapter 17 Piketty discusses the potential for transnational arrangements that, by gradual steps and widening influence, might become effective. He admits that: Establishing mutual confidence and norms of transnational justice is a delicate, highly fragile exercise, and no one can predict how cooperative arrangements might evolve. He notes in particular that: …although it is clear that many of the rules and treaties that currently govern international trade and finance must be profoundly reformed, it is important to propose a new international legal framework before dismantling the old one. [Pg. 1031] That is one lesson made obvious by the Brexit fiasco.
In this final section of Chapter 17 Piketty observes:
While it is essential to propose a new framework for cooperation before abandoning the old one, it is impossible to wait for the entire world to agree before moving ahead. It is therefore crucial to think of solutions that will allow a few countries to move toward social federalism by signing codevelopment treaties among themselves while remaining open to others who might eventually wish to join them. [pg. 1032]
* * * * * * * * *
Reducing inequality requires an understanding of its many guises and its many causes. Thomas Piketty has not been the first economist to examine these and to go on to suggest ways and means for keeping excessive inequality in check. Readers of my blog posts on this topic will already have met the seminal work by Joseph Stiglitz (2012) in his book about inequality in the USA, published under the title The Price of Inequality. In what follows below I will compare what Stiglitz & Piketty have recommended for reducing inequality. [I had “promised” to examine proposals for actually reducing inequality some years ago, at the end of my synopsis of the Stiglitz book, which synopsis did not summarize his final chapter on recommendations for reducing inequality in America.]
Since Stiglitz published his book, Anthony Atkinson (2015) published his recommendations for reducing inequality, as seen particularly from the situation in the United Kingdom. His book bears the title Inequality: What Can be Done? As hinted earlier above, Piketty shares many of Atkinson’s views about “what can be done”. I will examine and contrast some of those views, by Stiglitz and by Atkinson, below.
That said, please excuse (or skip) this temporary interruption:
My synopsis of Stiglitz’s book was posted on March 23, 2015. It followed four other relevant posts on the topic of inequality dating from 2012, starting with a synopsis of the 1957 classic by Leopold Kohr titled The Breakdown of Nations. Kohr’s book does not appear, on its surface, to be related to issues of inequality. It is a book detailing the dangers of unchecked growth, not so much growth of wealth, but the growth in complexity, of size in general, and the size of nations in particular. It was only after I finished reading Stiglitz that the potential relevance of Kohr’s book to dealing with inequality struck me. But what also struck me (a retired professor) was that all my more recent posts on inequality seemed to be “lectures” for an timely seminar on the topic of inequality. As I now envision it, that seminar would take up the following readings, in roughly the chronological order of their publication (and my synopses of them on this blog), as follows:
1) The Trouble With Billionaires by Linda McQuaig & Neil Brooks (2010) Viking Canada [Penguin Books 2011]. This is a delightful read and a helpful introduction to the topic, with basic concepts explained particularly well.
2) The Spirit Level by Richard Wilkinson & Kate Pickett (2009) Allen Lane [Bloomsbury Press 2010]. This is an accessible report and an extensive summary of the early social-science epidemiology that has linked inequality to health and social ills world-wide.
3) The Spirit Level and its Critics. This is my own summary report about the public alarm and strong opposition from corporate interests to the socialist-sounding implications of the widely discussed work of Wilkinson & Pickett. I posted this blog on September 5, 2014.
4) The Price of Inequality (2012) by Joseph Stiglitz [W. W. Norton & Co.] This is the first popular and widely read economist’s report on why inequality of wealth is so common and extensive in the USA.
5) The Economics of Innocent Fraud (2004) by John Kenneth Galbraith. [Houghton Mifflin]. This is a short book, published posthumously, and rather in need of editing. But it nicely complements and underscores some key points Stiglitz made later. Were I teaching it, I’d only require reading my selective synopsis of it, posted in March of 2016, not the original.
6) And while we were at it, I’d also require reading of my own very short piece entitled Pleonexia and Human Nature, posted in May of 2014.
7) Inequality: What Can be Done? (2015) by Anthony Atkinson [Harvard University Press]. This accessible book is primarily devoted to a view of steps that would go a long way to reducing inequality in the UK, but it also has wide implications for application in many other democracies.
8) Almost all the remainder of seminar would then be devoted to reading all of Piketty’s Capital and Ideology. Students would each be assigned to write a synopsis of some different one of Piketty’s first 16 chapters, and later would be required both to edit and improve one of those synopses written by a classmate, and also, similarly, to edit and improve my own synopsis of chapter 17.
9) At the end of this long course, students would then read Leopold Kohr’s book The Breakdown of Nations. (1957) Routledge & Kagan Paul [Green Books Ltd. 2001]. The last seminar meeting would consist of a discussion of what Kohr might have said about Piketty’s recommendations for reducing and controlling inequality, and what Piketty might be expected say about Kohr’s arguments that nations should be limited in size.
(Thank you for your indulgence.)
* * *
It is in chapter 10, the final chapter in The Price of Inequality, that Joseph Stiglitz emphasizes that “Another World is Possible.” He has shown in his previous chapters that America’s current economic ills, and its extreme inequality, are largely due to government decisions made beginning around 1980, decisions that created the environment in which a capitalist plutocracy could again prosper and endure. But this history also indicates that rather different government policies, laws, and oversight could reverse that trend. Early in chapter 10 Stiglitz asserts “Investing more in our society—in education, technology, and infrastructure—and providing more security to ordinary citizens will lead to a more efficient and dynamic economy, one more consistent with what we claim to be, and offering more opportunity to a wider segment of the society.” [pg 267]
Stiglitz, however, is most intensely concerned with the negative effects of “rent-seeking” income with its perverse effects on inequality, and thereby on society. “Rent” of this sort derives from the private ownership of something of value, from which income can (in that ugly modern phrase) be “monetized.” Ownership is a form of monopoly, and society is often willing to agree that access to such private property deserves to be paid for. But most will also agree that not all monopolies are acceptable, and governments may choose to forbid, or to own, and/or to tightly regulate them. “Rent-seeking” income, is derived from ownership, not labor; and in the US it is taxed at a much more favourable rate than is the income from wages and services performed.
Stiglitz, like Piketty, favors taxing all forms of income in a similar way, at proportionally higher rates for proportionally higher incomes. But for Stiglitz, in America, this is to be sought in certain discrete governmental arenas, and by unspecified policies introduced therein. He does not enumerate specific restrictive policies to achieve his desired ends, although some of those policies have been alluded to in his earlier chapters. And they are likely to be elaborated more specifically in his very recent book Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity. [W.W. Norton, 2020]
Stiglitz begins his list of recommended changes by advocating for new restrictions on activities in the “financial sector,” on banks and insurance companies and credit companies and mortgage companies. He acknowledges that this will be hard to do because under modern rules banks and financial corporations have become very clever at circumventing the rules. He goes on to encourage banking and Federal Reserve “reform” but does not get very specific about how that should be approached and effected. This is true for most of the other changes he would like to see in America.
Following financial sector reform, Stiglitz argues for stronger and more effective laws governing economic competition, corporate governance, and bankruptcy laws in particular. (Piketty’s emphasis is more on corporate governance, as we have seen, but doubtless he would agree.) Stiglitz mentions the excessive power and pay of corporate directors, and suggests that more transparency would help shareholders better control that pay. Next Stiglitz argues for controls on “government giveaways” to corporations, gifts in the form of privatized ownership, or government purchases for goods at non-bargained, unregulated “cost-plus” prices, or “gifts” awarded through favourable (limited) auctions, allowing the private monopolistic possession of resources like oil or gas.
Next, Stiglitz argues for sharply reduced “corporate welfare” that takes the form of current tax advantages and loopholes and government subsidies allowing corporations to avoid taxes, and sometimes even allowing them to avoid bankruptcy for risky and harmful practices. Much abusive corporate behaviour is enabled by the lack of financial transparency that is facilitated by complex tax laws, and by the conventions governing corporate accounting. These make such abuses easy to hide and hard to regulate. Like Piketty, Stiglitz emphasizes the needs for ensuring far more government and corporate transparency in accounting.
Stiglitz next argues for “legal reform” to give a defendant and a prosecution equal access to justice, without undue personal cost to achieve that access. It is legal services (“rents”) that Stiglitz wants to be fairer, and better at providing faster recompense to those who have suffered from medical or automotive or corporate malpractice. And then Stiglitz returns to the topic of a progressive income tax, and an enforced estate tax, to prevent a new or continuing plutocracy. Following this, Stiglitz advocates (in general only) for improved access to education, with the elimination of student debt as the cost of such access. He advocates for government assistance encouraging personal savings. (Atkinson proposes a direct way of achieving this.) Stiglitz advocates for a universal health system with better control of its costs from the private sector insurance companies. He advocates for an expanded social safety net, with further government spending on food stamps, social security, etc. He advocates for better protection for workers from the effects of globalization, causing lower wages and often loss of employment. Stiglitz continues with a list of economic goals for America: full employment, a better monetary policy, reducing its trade imbalance, enabling unions, affirmative action to eliminate discrimination, restoring consumer “demand” and income, redirecting investment to preserve jobs and the environment (he calls this improving the quality of economic growth), and finally, better and more housing for the under-served. But how these goals can soon be approached is generally left to others, or for later.
Like Piketty, Stiglitz does however recognize the political challenges to realizing any of his wide-ranging plans and goals. Those challenges are increased by the political climate in the USA and the fact that much of the media and the government have been captured to a large degree by corporate lobbyists and plutocratic control. Stiglitz urges campaign finance reform, but recognizes the unlikelihood of congress approving it. Piketty suggested that some solutions to problematic inequality that are achieved by other nations, solutions acting as beacons and giving reassurance that these arrangements do succeed, will likely be necessary before public dissatisfaction with American inequality reaches a level where the political will for reform will permit effective steps taken toward that reform.
* * * * * * * * *
Stiglitz is but one of the economists who have looked for solutions to the problem of excessive inequality. Another has been the UK economist Anthony Atkinson. Throughout his book Inequality: What Can be Done? Atkinson lists fifteen proposals for reducing inequality. These proposals summarize a set of arguments that Atkinson makes most directly in chapters 4 through 8 of his book. That book was published in 2015 by Harvard University Press. (Page references below refer to that first edition of his book.)
In the first three chapters of Atkinson’s book, like Piketty’s far longer prelude, he examines the historical conditions, particularly over the past 90 years, that appear to be associated with the rise and fall of inequality in differing western industrial countries. Having done this research, Atkinson is led to report: “It is my belief that the rise in inequality can in many cases be traced directly or indirectly to changes in the balance of power. If that is correct, then measures to reduce inequality can be successful only if countervailing power is brought to bear.” [pp. 82 – 83] The “power” Atkinson is referring to here is political power, deriving from greater democratic equality. Then, summing up the historical research, Atkinson writes:
In the past, there have been significant periods when inequality has fallen. These include not just the exceptional wartime period, but also the post-war decades in Europe and the recent decade in Latin America. …Experience suggests that a fall in inequality has come about through a combination of reduced inequality of market incomes and more effective redistributions, and this [will be my] basis for the proposals made here. [pg. 110]
The “market incomes” he cites here include incomes from wages & bonuses, and also income from capital investments including dividends. The “redistributions” he alludes to here include government transfers protecting health care, unemployment benefits, and pensions, etc. Soon after, Atkinson writes:
A number of [my] proposals involve the classic [strategies] of progressive taxation and social protection, and I can already hear critics dismissing them as either boringly familiar or wildly utopian. I do indeed set out proposals for “taxing and spending” …but one of the main themes of [this] book is the importance of measures to render less unequal the incomes people receive before government taxes and transfers. Today’s high level of inequality can be effectively reduced only by tackling inequality in the marketplace. [pg. 113]
This said, Atkinson had been discussing the increasing effects of automation on the current labour force when he wrote the above, and so he begins chapter 4 introducing his proposals for controlling inequality by looking at the issues likely to be exacerbated in a world where machines take over much of the work formerly done by humans.
* * *
Proposal 1. The direction of technological change should be an explicit concern of policy makers, encouraging innovation in a form that increases the employability of workers and emphasizes the human dimension of service provision. [pp. 118-19]
Atkinson points out a dual need for controlling the disappearance of employment opportunities (keeping work and wages available) and recognizing the public need for human services of two sorts: services that only humans can normally provide, services that will become increasingly important in the future (e.g. doctors, nurses, teachers, care-givers, lawyers, judges, advisors, therapists, etc.) and services where human contact will remain part of the desired package (e.g. bartenders, waitresses, taxi drivers, complaint department services, etc.) Automation can simultaneously facilitate and threaten many of these service jobs, depending on the commercial incentives put in place for maintaining them. Atkinson urges policies and planning that anticipates the threats to future job numbers, and the opportunities for advance training of a work force that will be needed in an expanded, modernized, service sector. He writes:
Policy makers should take account of the rising future value of public services that results from the progress made in the economy as a whole. …We tend to think of investment in terms of infrastructure like roads or airports, but equally—or more—important is investment in human capital. …[There should be] a higher valuation being placed on the work of those who facilitate human capital investment. [pp. 122]
Proposal 2. Public policy should aim at a proper balance of power among stakeholders, and to this end should (a) introduce an explicit distributional dimension into competition policy; (b) insure a legal framework that allows trade unions to represent workers on level terms; and (c) establish, were it does not already exist, a Social and Economic Council involving the social partners and other nongovernmental bodies. [pg. 131]
“Competition policy” generally seeks to limit discriminatory and unfair pricing, the limited access to resources, and limits on competition by other firms, all things that otherwise a monolithic and monopolistic corporation can abuse. The “distributional dimension” that Atkinson is referring to is the unequal and unintended effects that competition policies can often have on small and local businesses and on consumers with little income. Atkinson gives the example of a very large banking firm that decides to close many of its small branches in rural towns, with severe effects on the affected rural communities. Those being harmed need to be heard and heeded before policies allowing such harm are proclaimed.
Atkinson, like Piketty, also sees the decline of trade unions as having produced deleterious effects on inequality and on social harmony, not to mention corporate productivity. He will be advocating for a more secure legal framework for unions to exist and to have a say in government policy. In particular he will be advocating for a national “Social and Economic Council” to facilitate that input, as governments consider changes in policy that will effect workers and social organizations and consumers and governments themselves. Councils bearing this name already exist in a number of European countries, particularly so in the Netherlands, but also in the United Nations itself. The UN Council provides overall guidance and coordination among UN agencies and commissions. In the Netherlands the Social and Economic Council is the major advisory body to that nation’s cabinet. It has representation from trade unions, chambers of commerce, employer’s organizations, and more. (Here too, Atkinson will have somewhat more to say about his preferred Social and Economic Council further on.)
* * *
Proposal 3. The government should adopt an explicit target for preventing and reducing unemployment and underpin this ambition by offering guaranteed public employment at the minimum wage to those who seek it. [pg. 140]
Atkinson recounts the long history of governments and their job creation programs starting with the WPA (Works Progress Administration) that was part of Franklin Roosevelt’s New Deal in the late 1930s. There were a dozen countries in 2010 that still maintained some forms of direct job-creation projects, although in the USA Ronald Reagan strongly opposed such efforts and put an end to them in 1981. Atkinson proposes a program offering at least a certain number of hours of work per week (he suggests 35). It would be strictly voluntary, and failure to apply would carry no financial penalties of any sort. Workers who had part time employment elsewhere would be eligible for hours of public employment supplementing the work hours they already had, insofar as that could be made available.
Public employment plans are often criticized as competing with the private sector and as being likely to prevent the private sector from finding employees. In rebuttal, Atkinson quotes from a detailed review of U.S. experience as follows
Public service employment done wrong can be wasteful, inefficient, displacing, and counter-productive. …Public service employment done carefully seems to be able to increase employment, keep displacement near 25%, and produce genuinely valuable output. [pg. 144]
“Displacement” here refers to the requirement of moving to live near the place of work, with housing often included in the work offer. Atkinson goes on to stress that his plan is not intended as a temporary, emergency, arrangement. It is meant to be developed carefully over time to provide employment that is meaningful and continuing. He sees a need for such a plan to expand services, including such services as: child care, pre-school education, school support, youth services, health service, care for the elderly, meals on wheels, library services and police support activities.
* * *
Proposal 4. There should be a national pay policy, consisting of two elements: a statutory minimum wage set at a living wage, and a code of practice for pay above the minimum, agreed as part of a “national convention” involving the Social and Economic Council. [pg. 148]
Atkinson next looks at what might be an appropriate minimum wage. He advocates using a proportion of each nation’s median annual income as the bench mark for deciding the minimum wage. Using data from twelve countries in 2010, he found minimum wage incomes that ranged from about 37% of the median income, in Japan, to about 60% of the median income, in France and in New Zealand. In the case of Atkinson’s UK, the minimum wage determinations were considered only in terms of their hourly rate related to the median hourly rate of all wage earners. But a minimum wage decided on this basis only makes sense if minimum wage earners have full weekly and yearly employment, which very many do not. Thus, for most employees even a “good” minimum wage does not assure a livable wage or any escape from poverty.
Previous UK research into the needs of real families working for a minimum wage led to a recommended “Minimum Income Standard.” This “standard” was then reduced somewhat, in response to concerns from employers fearing that they could not afford to pay so much more. That somewhat-reduced standard called for a minimum wage that was 20% higher than the existing level in the UK at the time. But the research leading to this Minimum Income Standard actually supported a higher minimum wage, corresponding to 60% of the UK median income (a level that France and New Zealand had already adopted in 2010.)
Atkinson also examined proposals in Switzerland and other countries that legally limit (cap) the top end of the pay scales in companies and organizations. A narrowly defeated Swiss proposal would have limited executive (top) pay in any company to 12 times the lowest pay in the company. In the UK Atkinson cites one company that voluntarily “limits” the highest executive pay to 75 times the average salary. (Again, note that the average salary is likely to be considerably higher than the median salary, and far higher still than the lowest wage.) Meanwhile, a different UK company puts its pay limit at just 6 times the lowest salary. Atkinson argues for the national reconsideration of pay ranges, voluntary or mandatory, setting out “an ethical approach to pay.” He suggests this would best be undertaken by a government’s Social and Economic Council, in conjunction with considerations of the basic income supports and the capital endowment supports he also advocates.
* * *
Atkinson begins his next chapter stressing that “It is necessary to keep distinct the beneficial ownership of wealth and the control conveyed by capital over economic decisions. [pg. 155] An investment in a pension fund makes the investor the beneficiary of the interest from that fund, but it separates him or her from any power over the decisions made by the corporations in which that fund has now placed the investor’s capital. As Piketty has also underscored, corporate decisions need the input of all stakeholders, employees, stockholders, and also those whose indirect investments depend upon long-term corporate endurance. Moreover, Atkinson feels that savings and investments need to be more equally and widely encouraged than currently they are, and not just limited to the few among whom wealth has become concentrated. Beneficial ownership of wealth needs to be broadened, and its say in corporate decision making needs to be increased.
Proposal 5. The government should offer, via national savings bonds, a guaranteed positive real rate of interest on savings, with a maximum holding per person. [pg. 168]
Atkinson points out that this proposal is not a radical one, and it has been instituted, with some success, in different places and times in the past. Contrasted with the very low rates of interest currently available to most investors, at rates of return that too often are “negative” (in the sense that currently they pay less than the inflationary rise the in cost of living) inflation-indexed bonds of the sort here proposed are guaranteed to grow in real value at the interest rate specified. For savers of modest means, these bonds can encourage savings and assure a growing return on investment whatever the inflationary environment may be. Atkinson suggests that the rate of return, over inflation, should be determined by the Social and Economic Council following wide public input. He notes that in the UK such bonds have previously been offered at rates as high as 1.35 percent over inflation, a value roughly equal to the recent expected rate of real growth of median household income in the UK.
* * *
Proposal 6. There should be a capital endowment (minimum inheritance) paid to all at adulthood. [pg. 170]
Atkinson attributes the concept of a universal capital endowment, and the moral arguments for it, to Thomas Paine in 1797, and more recently in the US, to Bruce Ackerman and Anne Alstott. An early variation on this idea was introduced in the UK in 2001, but it was abandoned in 2010 by the new Conservative coalition government. After introducing this proposal above, Atkinson is quick to agree that it needs to be fleshed out. It must be decided when it should be paid, how it should be phased in, how large the amount should be, and how it should be financed. Atkinson does not use the word “universal” in his proposal however. He recognizes the need to address the questions of who should be eligible to receive it, and what restrictions, if any, should be put on the use of this “inheritance.” As we have already seen, Thomas Piketty, has since made some illustrative suggestions of his own in answer to some of these open questions.
Atkinson offers suggestions for phasing in such a proposal, tied to the UK’s “Child Benefit” plan. As for the size of the endowment, Atkinson notes the US proposal by Ackerman and Alstott for an $80,000 sum, to be paid from a 2 percent annual tax on personal wealth. Atkinson favors granting the endowment at age 18, while Piketty suggests age 25. Atkinson is cautious about imposing any restrictions on the use of the inheritance money primarily because that would add significantly to the costs of its administration.
* * *
Atkinson next turns his attention from the arena of personal wealth to that of communal (government) wealth. This leads to an immediate consideration of national debt. Atkinson quotes Dwight Eisenhower approvingly for the latter’s assertion that: “I do not feel that any amount can be properly called a ‘surplus’ as long as the nation is in debt. I prefer to think of such an item as a ‘reduction on our children’s inherited mortgage’.” Atkinson points out that not only is government debt carried forward in the future but so are pension liabilities, the costs of infrastructure maintenance, the maintenance of public wealth (think national parks, postal service, and stadia, etc.) and the conservation of government financial assets, to name but a few. For Atkinson both national assets and national liabilities must be transparently monitored, publicized, and carefully husbanded. For this purpose he introduces proposal number seven.
Proposal 7. A Public Investment Authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and in property. [pg. 175]
The capital investments made through such a fund, as envisioned by Atkinson, would not be used for any form of “stockholder” control or for any say in management of a firm. The firms would remain in private hands, but the dividends paid would add to the wealth fund. Atkinson appears not to favour nationalization and government management of any companies, even of utility corporations that have monopolistic reach over defined national regions. But Atkinson does say: “I am not advocating a totally passive Investment Authority. Its investments should be governed by ethical criteria…and by its sensitivity to its wider social responsibilities.” [pg. 178]
* * *
Atkinson begins his next chapter turning his attention to potential forms of taxation that he believes would be best designed to reduce inequality and to fund his wide proposed spectrum of social services. He will propose measures to increase the revenue collected on income, capital, and wealth transfers, reversing recent Conservative trends that included lowering income and wealth taxes but increasing VAT (sales) taxes on consumption items, and at the same time increasing required social security contributions from wage earners and employers. Atkinson seeks a tax formula that not only could maximize government revenue, but also one that would be fair for the those earning less than the average income, and one that does not “penalize” the earning of extra income through claw-backs by means of higher taxation or reduced benefits from the government.
Atkinson is persuaded that for the UK, the top marginal tax rate for the very wealthy should be capped at 65%. And thus he proposes:
Proposal 8. We should return to a more progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent, accompanied by a broadening of the tax base. [pg. 188]
He explains that the “broadening” here would entail removal of certain investor benefits and certain tax advantages for payments to private pension funds by employers. He spends some time analyzing, and suggesting changes to, the taxation of both pension investments and eventual pension income.
In the UK at the time of Atkinson’s writing, income from Capital (investment income) was being taxed at a higher rate than was earned income. Atkinson advocates an earlier arrangement when there was no difference between earned income and capital income. He then proposes a tax deduction (“discount”) for the first “band” (bracket) of earned income so as to recognize the need to protect low income taxpayers from any rise in their taxes. And pension income would count as “earned” income. Thus:
Proposal 9. The government should introduce into the personal income tax an Earned Income Discount limited to the first band of earnings. [pg. 192]
Atkinson then turns his attention to a policy for taxation of inheritances and of property. He cites Piketty’s data from France that in the nineteenth century the transfer of wealth from gifts and inheritances was equal to between 20 and 25 percent of national income. By 1950 that figure had dropped to about 2.5 percent. But by 2010 it had returned to 20 percent. For Atkinson these data suggest that taxation of wealth transfers can be used to finance government social programs without undue hardship on the economy. He recommends that gifts and inheritances be taxed as income to the donee, without any tax deduction being allowed to the donor. Atkinson advocates a special cumulative lifetime record of gifts & inheritances received, below some threshold for which no tax would be paid, but after passing the threshold all additional gifts would be taxed (progressively) when they were received. It would be from this tax revenue that Atkinson suggests the funds received be allocated to pay for his proposed Capital Endowments (Proposal 6.) And so:
Proposal 10. Receipts of inheritance and gifts inter vivos should be taxed under a progressive lifetime capital receipts tax. [pg. 194]
Proposal 11. There should be a proportional, or progressive, property tax based on up-to-date property assessments. [pg. 198]
Atkinson does not propose an overall wealth tax, in part because the administrative costs of such a tax are likely to be very high. Moreover he appears to believe that much the same benefit for reducing wealth inequality, with less administrative complexity, might be achieved by increasing the capital gains tax in the UK. Like Piketty, Atkinson believes that a wealth tax would need to be global to be most effective. Still, he does propose further examination of the requirements for any successful implementation of an annual wealth tax.
Atkinson next considers the taxation of corporations. He observes that “corporations benefit from the infrastructure of the countries in which they sell: the physical assets, such as roads, the legal structure, and the administrative apparatus of the state.” [pg. 203] A certain taxation of their sales would be appropriate, to cover this national contribution to their work. As currently written, corporate tax laws permit many deductions that end up reducing the corporate tax bill, often to zero, and often including carry-forwards for future deductions. In the US a “minimum tax” on corporations was earlier passed by congress to begin addressing these unintended tax avoidances. Here too, Atkinson stops short of proposing a minimum corporate tax, and recommends further study of this idea, and the idea of a global tax regime for very wealthy individuals.
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In his next chapter Atkinson looks at forms of Social Insurance, Social Assistance, and Basic Incomes. In the UK there are aspects of all three benefits, particularly for families with children, where the “Child Benefit” is currently a form of Basic Income. UK benefits for Social Assistance, and to a lesser degree Social insurance, are currently subject to means-testing, with many administrative complications and perceived injustices in consequence. Moreover, the existing withdrawal of these benefits, as employment income increases, negates the net value to the individual for working harder. In effect higher taxes nullify the higher income. And surprisingly, benefits requiring means-testing are generally claimed by far fewer than the number of people eligible to receive them. Application forms for these benefits are often hard to fill out correctly and can be daunting in their length. Atkinson grants that means-testing benefits are better than nothing. But income-testing need not be required at all with an effective use of a Basic Income policy. That policy could start soon with a plan for a basic Child Benefit.
Proposal 12. Child Benefit should be paid for all children at a substantial rate and should be taxed as income. [pg. 218]
Atkinson likes the Basic Income concept for all citizens, but he has reservations about directly implementing it for adults, in part because that would involve the complicated administrative matter of removing or modifying existing social transfer programs. He proposes a modified Basic Income plan, one that mostly complements and leaves in place the existing social insurance and social assistance programs in the UK. He calls his plan “Participation Income.” He proposes that it be paid to “participants” in the UK economy who contribute to it by their employment or self-employment, or by seeking education, or by home care for children or the elderly, etc. There would be provisions made for those who are too ill to participate or who are prevented by disability from participating. Atkinson then goes on to explore some potential criticisms and supporting arguments for his proposal. He notes that if it could be expanded to the entire European Union it would be less problematic to administer and perhaps fairer, for instance to pensioners living outside the UK.
Proposal 13. A participation income should be introduced at the national level, complementing existing social protection, with the prospect of an EU-wide child basic income. [pg. 223]
Atkinson then discusses the need for a universal and more generous pension plan for the UK (as well as for other nations that may lack these.) This pension would be easier to administrate, involving no means-test. It would be in effect a “Minimum Pension Guarantee.” Unemployment insurance, another social protection (in the UK, called “Jobseekers Allowance”), also needs a more generous boost in Atkinson’s view. He calls for assuring much wider and relaxed coverage (eligibility) for this, and for closely related social insurance plans. In 2005, in the UK only about 33% of the working-age unemployed actually received these benefits. In 1985 it had been over 70%. In 2005, in the US, less than 20% of the unemployed received benefits, while at the same time in Germany 75% did. In the absence of something like a universal basic income, increased social insurance benefits appear even more necessary. Atkinson concludes (as has Piketty) that a transparent and dedicated portion of income tax revenues, reserved strictly for adequate unemployment and allied social benefits (or, by extension, for a universal basic income plan) would produce much less taxpayer resistance. And so:
Proposal 14. There should be a renewal of social insurance, raising the level of benefits and extending their coverage. [pg. 231]
Atkinson has one further proposal to offer, recognizing that global inequality impacts national inequality and thus it too should be addressed by every nation. Global inequality increases refugee migration, international terrorism, and spill-over effects from global diseases and famines. Atkinson stresses that there are also universal ethical reasons for addressing global inequality by supporting international aid efforts. He observes that international aid is often justified only in purely economic terms. Only if that aid produces economic growth in the recipient nation is it considered “successful.” But Atkinson stresses a wider justification of international aid, particularly in terms of basic human rights. International aid can and should be used primarily to support things like basic health care and early education, things which would in turn reduce human conflict and general inequality. And so, his final proposal is:
Proposal 15. Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income. [pg. 236]
Lastly, Atkinson supplements his 15 proposals with 5 further “ideas to pursue” which are proto-proposals meant to supplement and reinforce some of the proposals he has already introduced above. These “ideas” require more discussion and consideration, given fluctuating current conditions. The five are listed on pages 238–39 of his book, and have been noted in passing on a few occasions above.
In the final three chapters of Inequality: What Can be Done? Atkinson turns to address the two main objections he hears most often : that “it cannot be done” and that “it will cost too much to do.” He has already anticipated, and partly addressed, some of these objections. But now that the reader has heard all of his proposals, Atkinson can more effectively argue that in fact it can be done and it can be afforded. Then, in the final short section of his book (on pages 301-308) he gives the reader a very effective summary of his 15 proposals and 5 ideas to pursue. These constitute his reasons that citizens in the UK might hope to see their country’s inequality significantly reduced in the future.
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Reducing inequality at the national level will never be easy. Different nations will face different impediments at different stages of their development. Different governments and different legal systems will face unique challenges, but also unique opportunities for achieving their desired restrictions of inequality. Different levels of those democratic inequalities, associated with differing levels of political power across the nation’s population, and associated with differences in the levels of social trust among various groups in the nation, will also need to be addressed if significant declines in inequality are to be achieved. Piketty and Atkinson and Stiglitz have each been right to emphasize the importance of transparency and wide social participation in formulating and carrying out improved government policies. No important change to government policy can be made without first insuring widespread social trust among the population.
It is important to keep in mind, however, that national policy change will not be the only arena where reducing inequality can be pursued. Regional governments, and local community governments can also be arenas for addressing some aspects of inequality, successes with which may then make it easier to extend the same solutions “upward” to a state, provincial, or national level. Piketty’s global hopes for co-development treaties between nations, treaties that also facilitate limitations of national inequality in a trickle-up fashion, are equally applicable to a trickle-up solution to overcoming many of the impediments to reducing inequality inside each nation. As Piketty has suggested, the most effective and desirable locus for controlling inequality may eventually be in part global. But the easiest and most accessible locus for achieving useful first steps toward this goal could well lie much closer to the local village green or city hall, or county seat, than it does to the nation’s capitol.
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© J. Barnard Gilmore Kaslo, British Columbia November, 2020