0.4 Income distribution  (Page 9/18)

Sweden has since 2004 sharply reduced rates of income taxes, and, contrary top rates of income and corporate taxes have to the wealth tax proposal of Piketty and Donald Trump taxes on wealth but inheritances have been virtually abolished, in a country where concerns about income inequality have for decades been paramount.

The principal contribution of Piketty’s book is his use of huge data sets to show how differences in rates of economic growth and the rate of return on capital have increased wealth inequality. For developed nations he notes that the historical rate of economic (g) growth has been approximately 3%. But he maintains the historical rate of return on capital (r) (note: non-human capital) has typically been between 4 and 6%.

The excess of the real rate of return on capital (r) over the real rate of growth (g), according to Piketty, increases income inequality over time. This is largely because the wealthy, being wealthy, are able to save more from differentially rising investment income. Under these circumstances, differences in wealth accumulation grow over time, and the share of the wealthy in total wealth grows.

While the present author is not yet fully convinced that Piketty has established that in the U.S. and Europe, long term, Note that Piketty does not show that r>g has been typical of emerging nations in recent years. returns to capital have grown faster than economic growth, his claim is nevertheless plausible, given factors already discussed in Chapter 3 and in this Chapter.

This is because the share of labor income in national income has shrunk (see Figure 4-4), and the share of labor costs in total production has declined (Fig. 4-5). These developments are consistent with Piketty’s claims.

Piketty’s work has been roundly praised by some economists and roundly criticized by others. Much, but not all, of the controversy centers around questions about his data and his use of same. Economists such as Nobel Laureates Paul Krugman and Joseph Stiglitz have given the book enthusiastic praise. See Paul Krugman, “Why We Are in a New Gilded Age (2014, May 8), ” The New York Review of Books. Also see Edward Lazear (2014, May 5), “A Gifted Economist and the Ultimate Social Scientist,” Wall Street Journal . On the other hand, such well-known and respected economist such as Martin Feldstein of Harvard and Chris Giles (economics editor of the London Financial Times ) argue that Piketty’s number “do not add up.” Martin Felstein (2014, May 14), “Piketty’s Numbers Don’t Add Up,” Wall Street Journal . Giles goes as far as to dispute Piketty’s claim that wealth inequality has risen since 1980, and argues that the “conclusions of Piketty’s book do not appear to be backed by the book’s own sources”. “Picking Holes in Picketty,” The Economist , May 31, 2014 Critics such as Harvard’s Greg Mankiw argue that Piketty’s recommendations are motivated by ideology more than economics. “Bigger Than Marx,” The Economist , May 3, 2014

Other critics such as Tyler Cowen of George Mason University maintain that Piketty’s definition of capital is defective: He maintains that Piketty sees capital as a “growing homogeneous blob,” and therefore fails to consider variations in the returns to wealth. Tyler Cowen, (2014, May/June), “Capital Punishment: Why a Global Tax on Wealth Won’t End Inequality”, New York, NY: Foreign Affairs . And of course, Piketty’s definition of capital is also defective because it excludes human K, which in many developed nations is more than 2/3 the total.