Economics, Democracy

Thomas Piketty’s Problematic Political Philosophy Part IV: Inequality and Transparency

We come to the normative argument that Piketty regards as the most important: that the great and increasing amount of wealth inequality is too easy to hide and so makes the distribution of wealth inaccessible to the voting public. The benefit of the global progressive tax on capital is that it will help to stop tax havens and make wealth inequalities a matter of public record. So here are the two arguments:

3E. Lack of Transparency: r > g entails high levels of wealth inequality that are easy to hide under present legal conditions. This makes the true distribution of wealth inaccessible to the voting public, preventing them from making rational collective decisions.

3P. Increasing Transparency: A global progressive tax on capital will stop tax havens and other institutions that make it difficult if not impossible for the general public to know the distribution of wealth, as the taxing power will generate accurate records.

It turns out that there is no argument that patrimonial capitalism is the cause of the present lack of financial transparency, other than the fact that large owners of wealth have successfully resisted attempts to get them to disclose their wealth holdings. Instead, the case for 3E is just the observation that, under current legal conditions, the high level of wealth inequality is easy to hide, especially in light of the international mobility of wealth holdings, say via tax havens. So the public is misinformed about wealth inequality levels. That is evaluatively problematic for our present economic and institutional circumstances.

But importantly, the r > g dynamic is clearly neither necessary nor sufficient for a lack of financial transparency, nor does Piketty claim as much. The evaluative problem is epistemic: we just don’t know how much wealth inequality there is, and Piketty thinks he’s underestimating it. Here’s the rough idea in Piketty’s words:

The inescapable reality is this: wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities. That is why it is so essential to study capital and its distribution in a methodical, systematic way. (259)

So there’s some connection between wealth inequality and a lack of transparency, though it is not clear whether the connection is causal. But it turns out that the case for 3P does not depend on 3E. 3P can be grounded in 1E and 2E much more easily. Piketty seems to acknowledge this:

The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth [KV: 2E], and second to impose effective regulation on the financial and banking system in order to avoid crises [KV:1E]. To achieve these two ends, the capital tax must first promote democracy and financial transparency: there should be clarity about who owns what assets around the world. (518)

So the capital tax promotes transparency, and so facilitates the ability of governments to compress inequalities and regulate financial instabilities. I. Increasing Transparency

I. Increasing Transparency

As before, you can click here for all the passages I found relevant to substantiating 3P: 12, 259, 444, 455, 472, 474, 494, 515, 518, 519, 521, 525, 526, 529, 530, 569, 570 and two passages from Piketty’s reply to the Financial Times.

Some samples:

Taxation is not only a way of requiring all citizens to contribute to the financing of public expenditures and projects and to distribute the tax burden as fairly as possible; it is also useful for establishing classifications and promoting knowledge as well as democratic transparency. (12)

Such a tax would also have another virtue: it would expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows. (472)

The benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today—the future of the social state, the cost of the transition to new sources of energy, state-building in the developing world, and so on—because the global distribution of wealth remains so opaque. (519)

When we know the distribution of wealth inequality, we’ll know how much the wealthy can contribute, and that knowledge is “the most important justification of a progressive tax on capital” because “capital is a better indicator of the contributive capacity of very wealth individuals than is income, which is often difficult to measure” (526).

Also consider Piketty’s replies to the FT:

In fact, one of the main reasons why I am in favor of wealth taxation, international cooperation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which everybody could agree with).

3P’s logic is simple: if we have a well-coordinated progressive global tax on wealth, we will be able to track the distribution of capital-based wealth all across the world. And that information will be helpful to the voting public.

Finally, consider Piketty’s most succinct statement about the point of the book:

The main message is that we need more democratic transparency about wealth dynamics, so that we are able to adjust our institutions and policies to whatever we observe.

So if all the other arguments fail, Piketty is happy to place a great deal weight on 3P. This means that if 3P fails, it is an enormous problem for the normative arguments in the book.

II. A Global Capital Tax is Not Necessary for Transparency

Taxes destroy wealth, at the least in the process of transfer but also in the disincentives they induce for the accumulation of wealth. Even if you think these effects are small, they should not be denied. So if we can achieve global financial transparency without destroying wealth, then we should do so.

Importantly, Piketty seems aware of the fact that there may be other methods:

But if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapting to today’s challenges. The ideal tool would be a progressive global tax on capital, coupled with a very high level of international financial transparency. (515)

The tax should be coupled with a very high level of transparency. This implies that we could get the financial transparency without the tax. Consider Piketty’s reply to the FT:

 In fact, one of the main reasons why I am in favor of wealth taxation, international cooperation and automatic exchange of bank information is that this would be a way to develop more financial transparency.

So we should favor wealth taxation, international cooperation and automatic exchange of back information to produce financial transparency, so the global tax is not doing all of the transparency-generating work.

The question is why the global tax is necessary for transparency. It does not appear to be. And if it is not necessary, the main normative argument in Capital fails.

I don’t want to be uncharitable, so let me see if there’s anything more to be said. That is, what does confiscating wealth add to transparency that simple disclosure requirements wouldn’t allow? Perhaps there’d be some resistance to transparency via simple disclosure requirements that wouldn’t apply to a tax. That’s hard to imagine, given that there’d be opposition to the tax as well. Maybe the idea is that people would focus on opposing a tax level and forget all about the transparency/privacy issues, sort of like we have done with the income tax. Few people complain about having to report their income to the government because they’re focused on complaining about how much they have to fork over.

Alas, it seems to me that we’re now in the realm of serious speculation.

And notice that even if we think a tax is the best way to bring about transparency, the tax could be incredibly small and have the same effect. Why 2%? Why not .02%? That would achieve the same ends, wouldn’t it? At the very least, the goal of transparency can’t justify the level of taxation Piketty endorses.

So if you’re going to have governments confiscate wealth, generating dead-weight loss and reducing the incentive to accumulate capital, you need a good reason. The goal of financial transparency isn’t a good reason. Why not just require wealth disclosures?

I wish I were more sympathetic to Piketty so I could more easily come up with replies on his behalf. I’m sad to say that’s the best I can do! I need help from his fans.

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