Piketty’s wealth tax: An idea that just can’t work
Hurun’s global list of billionaires and a study on Indian inequality have revived interest in Piketty’s proposal of a wealth tax. This is an idea whose time hasn’t come—and might never
Indians who are not sure whether to be proud of fellow citizens crowding the world’s billionaire charts tend to see their ranks swell each time talk of inequality accompanies such rich lists. Like this year. The latest Hurun list of global billionaires has 94 new faces from India, with 10 drop-offs, taking the country’s total to 271. In comparison, China added only 55 people whose estimated wealth went above $1 billion over the past year, though it has as many as 814 people on the list, 14 more than the US, which saw 132 additions. This comes on the heels of a World Inequality Lab paper by Thomas Piketty and three coauthors titled ‘Income and Wealth Inequality in India, 1922-2023: The Rise of the Billionaire Raj.’ Its very title is loaded with a hint of plutocracy and hence political relevance. Its core finding of worst-on-record disparity between India’s top 1% and the rest did make many of us either sit up or shrug, but the data proxies that went into the study are so wobbly that its claim to empirical truth is woefully weak. Even so, the plausibility of Piketty’s arguments are hard to dismiss, especially the big one that catapulted his book Capital in the Twenty-First Century to fame. So long as annual returns on capital exceed the growth of everyone’s income (as tracked by GDP expansion), he noted, the pie of wealth would expand faster, leaving no hope for earners to catch up in such a lopsided economy. This would send the affluent into ever-more glittery orbits of affluence, unless we deploy a wealth tax to restore balance. Among leftists, this levy has acquired the aura of an idea whose time has come. It hasn’t, though.
A tax on wealth may tempt anyone who cares about equality as a social value, but such a proposal would be hard-pressed to survive its first contact with economic reality. As it happens, there exists a wide gap between what’s ideal and what is doable, a chasm strewn with the debris of Marxist tools. Taxes, for example, are best levied on flows of money, not stockpiles of riches. A tax can easily and equitably be applied to income, while the same cannot be said of wealth, which doesn’t show up on financial radars evenly enough for a fair slice to be taken away. Not all vaults are visible, and, like hidden bars of gold, a crypto stash online is just one of the more obvious ways to dodge detection. How various assets are valued could also create inequity in the liability math, since reliable mark-to-market figures are not readily available for real estate and other holdings. Asset illiquidity would pose its own hurdles. It would be unjust if a home-owner is slapped with a tax bill that can only be paid by a distress sale of the property that generated it in the first place. Of course, wealth estimates are mostly drawn from the stock-market value of shares owned by big shareholders. The very visibility of share-price data would make equity chunks the focal target of any wealth tax, but this would penalize a productive device for public participation in pursuits of profit. Not only would it deter businesses from going public, it would risk a flight of wealth to friendlier tax regimes abroad. And should an open intermediary’s capacity to mobilize funds weaken, overall capital allocation across the economy would turn more opaque and less efficient, with adverse consequences for all.
In an ideal world, a fiscal equalizer would not endanger the optimal use of money—a formula for prosperity with no parallel so far. But the real world, alas, is full of perverse outcomes. So why risk leaving everyone worse off?