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Orange County Register


Professor's Redistribution Argument Easily Refuted

May 06, 2014

By Diana Furchtgott-Roth

The Commerce Department announced last week that U.S. gross domestic product grew at 1/10th of 1 percent in the first quarter, putting it far below the return on capital.

According to French professor Thomas Piketty's book, “Capital in the Twenty-First Century,” Congress should now levy a substantial tax on capital, to bring its rate of return down to 0.1 percent, the rate of GDP growth. Piketty argues for a progressive annual tax on capital to restore balance so that inequality will not increase.

But it would be more useful to lower the tax on capital investment to stimulate such investment and jumpstart the economy and create more jobs.

How does Piketty justify higher taxes? Let me count the ways.

Piketty assumes that capital benefits only the top 1 percent. But people of all incomes benefit from a greater return on capital. At some time in their lives, most Americans will have retirement accounts or pension plans, which profit from growth in corporate income.

Piketty's ideal period is 1910-50, when both inequality and capital as a percent of output declined significantly because two world wars destroyed capital. Few want to return to those days.

Piketty measures income before taxes are subtracted and transfers are added. Pretax, pretransfer measures of income are not realistic measures of inequality.

Well-respected academic economists such Bruce Meyer (Chicago), James Sullivan (Notre Dame), and Richard Burkhauser (Cornell), calculated inequality of consumption, a more realistic guide to well-being than income inquality. They concluded that consumption inequality has not increased and that poverty, while not cured, is declining. Piketty does not mention their research.

Piketty ignores the movement of women into the workplace. One reason for increased household inequality is that wives increasingly began working outside the home in the 1980s. In the top fifth of the income distribution, households average two earners per family. In the middle quintile, households have about one earner per household. In the lowest fifth, there is one earner for every two households, with retirees and unemployed.

Nowhere in his 600 pages does Piketty mention the demographic changes that have taken place in the Western world.

Piketty misstates the history of the minimum wage. Piketty's biases are nowhere more obvious than in his account of the U.S. minimum wage.

He states, “From 1980-90, under the presidents Ronald Reagan and George H.W. Bush, the federal minimum wage remained stuck at $3.25. … It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008.”

Wrong, Professor. The federal hourly minimum wage increased by 27 percent under George H.W. Bush and by 21 percent under Clinton. George W. Bush signed into law the next increase in the minimum wage, from $5.15 to $7.25 over three years, a 41 percent increase.

President Obama has not yet signed a minimum wage increase into law.

Piketty's case for redistribution is simply not supported by evidence. Capital is already heavily taxed, and increasing taxes would slow the economy further. With a GDP growth rate of 1/10th of 1 percent, how much lower do Piketty's advocates want to go?

Original Source:



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