Skip to comments.Piketty’s Class-Warfare Tome: Bad Numbers, Bad Analysis
Posted on 07/12/2014 4:29:46 PM PDT by Kaslin
Why do statists make so many mistakes with data? Paul Krugman, for instance, has butchered numbers when writing about fiscal policy in nations such asFrance, Estonia, Germany, and the United Kingdom.
But Krugman isnt alone. We also have Thomas Piketty, who was lionized by the left after publication of Capital in the Twenty-First Century.
Ever since his book was published, various experts have called into question the veracity of Pikettys numbers. Most recently, heres some of what Alan Reynolds, my colleague at the Cato Institute, wrote about his data for the Wall Street Journal.
Thomas Piketty remains a hero on the left, but the honeymoon may be drawing to a sour close as evidence mounts that his numbers dont add up. data are so misleading as to be worthless. They attempt to estimate top U.S. wealth shares on the basis of that portion of capital income reported on individual income tax returnsinterest, dividends, rent and capital gains. This wont work because federal tax laws in 1981, 1986, 1997 and 2003 momentously changed (1) the rules about which sorts of capital income have to be reported, (2) the tax incentives to report business income on individual rather than corporate tax forms, and (3) the tax incentives for high-income taxpayers to respond to lower tax rates on capital gains and dividends by realizing more capital gains and holding more dividend-paying stocks.
Alan lists some of specific problems that exist when you try to make sweeping assertions based on tax return data.
For example, interest income from tax-exempt municipal bonds was unreported before 1987so the subsequent reporting of income created an illusory increase in top incomes and wealth. Since 1997, by contrast, most capital gains on home sales have disappeared from the tax returns of middle-income couples, thanks to a $500,000 tax exemption. since the mid-1980s, most capital income and capital gains of middle-income savers began to vanish from tax returns by migrating into IRAs, 401(k)s and other retirement and college savings plans. Balances in private retirement plans rose to $12.4 trillion in 2012 from $875 billion in 1984. When individual tax rates dropped from 70% in 1980 to 28% in 1988, this provoked a massive shift: from retaining private business income inside C-corporations to letting earnings pass through to the owners individual tax returns via partnerships, LLCs and Subchapter S corporations. Although more frequent asset sales showed up as an increase in capital income, realized gains are no more valuable than unrealized gains so realization of gains tells us almost nothing about wealth. Similarly, a portfolio shift from municipal bonds, coins or cash into dividend-paying stocks after the tax on dividends fell to 15% in 2003 might look like more capital income when it was merely swapping an untaxed asset for a taxable one.
So whats the bottom line?
Mr. Pikettys premonition of soaring U.S. wealth shares for the top 1% finds no credible support in his book or elsewhere.
But lets now conduct a thought experiment. What if Pikettys data was right? Would that justify punitive class-warfare tax rates?
Ive already explained that this would be the wrong approach.
And Diana Furchtgott-Roth of the Manhattan Institute cites some new academic research to make a similar point.
Meltzer and Richard show that using redistribution to ameliorate income inequality is not only ineffective, but worsens the problem that policy makers seek to cure. Since workers productivity levels increase with the more they produce, and because higher taxes create disincentives to working, taxes lead to lower economic growth. Higher tax rates that fund transfer payments hamper economic growth. Thats because they increase the number of people who depend on these payments and find it preferable not to work. There also is less learning-by-doing among those who work. As taxes and transfers rise, hours of work and acquired skills decline, reducing economic growth. it is this decline in hours worked for low-productivity workers that leads to more economic inequality not the growth of technology nor the rent-seeking privileges of the rich, two causes cited by Piketty. Reduced effort by the rich in reaction to higher taxes comes at the expense of economic growth, which has the potential to raise everyones living standards and increase economic opportunity. Meltzer and Richard show that the growth of government is the true driver behind inequality.
In other words, the supposed solution of ever-higher tax rates from folks such as Piketty (and Obama) would be harmful to the overall economy and be especially damaging to those with lower incomes.
If we want to help the poor, the goal should be to achieve faster economic growth by enabling capitalism and entrepreneurship.
In other words, copy Hong Kong and Singapore, notFrance.
Heres the video I narrated for the Center for Freedom and Prosperity explaining why class-warfare tax policy is so misguided.
Five Key Reasons to Reject Class-Warfare Tax Policy
P.S. This isnt the first time that Alan Reynolds has debunked Piketty.
P.P.S. These two pizzas tell you everything you need to know about how the left would define success.
P.P.P.S. And Margaret Thatcher exposed why their definition of success is absurd.
All the property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.
IOW, it appears that Ben thought you really didn't make that.
Who cares what BF said in a letter. Socialist redistribution did not make it into the Constitution. And despite what the Supremes may say, the takings clause bars redistribution of wealth.
I thought it was interesting as an indication of the POV of our more prominent Founders. One widely considered at the time and since especially wise.
This indicates that concern about this issue is not just something that started in the last few years.
What, if anything, should be done about the issue is another question entirely, of course.
Franklin was most likely thinking of Real Estate. Property taxes are already quite punitive to people who own lots of land (but don’t put it to productive use). Since he lived in a era before the Industrial Revolution kicked into full swing, he probably did not envisage the kind of wealth that individually owned (and directed) capital could create. I’m not sure how he could call the savings and investment of individuals “...property...superfluous to such purposes.” In fact, I seriously doubt he would think such. His only concern would probably be the purchase of influence that great wealth can bring, but that’s why we’re supposed to have a Constitution enforced by principled men. Namely to prevent cronyism from happening.
Here's what he actually said, "All the property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of."
That would mean what we would today call the basics. Presumably something similar to what we would call "a middle class lifestyle."
Here's a little more of Franklin's argument. "All Property, indeed, except the Savage's temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it."
Here he is pretty clearly in favor of death taxes at whatever rate society thinks proper. I'm not entirely sure what he meant by the last phrase, possibly something along the lines of a wealth tax.
Here's the whole section. Havent yet been able to locate the whole letter.
The letter is #1461.
That’s what he said and many people say things. Pollsters and marketers know that what people say isn’t as important as what they do.
What did he do?
Just like multi-term pols in DC, Paris corrupted old Ben.
Ancien regime Paris was of course renowned for its devotion to all forms of human equality.
Not wholly unlike the Ancien Regime currently residing in Washington DC.
Debunking Thomas Piketty is an easy GOPe diversion from the real task: reducing expenditures. That decision will be forced upon the country by the markets.
My point was that the dominant ideology in Paris of the time was quite the reverse of economic equality. In fact, the official government position was going backwards on even social and legal equality, having recently required additional proof of noble ancestry to obtain governmental and military positions.
Presumably, if Franklin had been corrupted by the Paris where he spent so many years, it would have been in the direction of the divine right of the aristocracy, not of proto-socialism.
You don’t see the common threads between the two? Socialism is a means to the American aristocracy, not an end. In the same way the Ancien Regime saw merit as a threat, so too do our political masters. Have you ever had to deal with a government bureaucrat? They hate success and merit, particularly if you’re “dumber” or less “educated” than they are. Don’t let the window dressing fool you. The heart of Socialism is anti-merit.
What you say has some merit, but completely misuses the term aristocracy. In the original Greek, as well as in the medieval equivalents, it dis not mean “rule by a few or elite.” That was oligarchy, of which aristocracy was a special case.
Aristocracy means, and has always meant, with the rare cases of Jefferson and other talking about “natural aristocrats,” rule by “the best,” with best defined as being those of good birth and breeding, the nobility. In the fading days of the Roman Republic, the party of aristocracy called themselves the Optimates, which means “the best.”
Our present masters care not about birth or breeding. The last two demo presidents were of the scum of the earth, from an aristocrat’s perspective. You have to go all the way back to JFK and FDR to find an aristocratic Democratic president or candidate. I suspect Kerry wanted to be viewed as an aristocrat, but I don’t think anyone thought of him that way, more a wannabee.
The GOP, with Romney and the Bushes, has a lot more recent examples of aristos running for or winning office.
Our present oligarchy is class-based, but with divisions between classes chosen by odd and apparently often indeterminate criteria. To my mind, most of the astonishing antagonism directed at Sarah Palin was of class origin. She just wasn’t a member of the class that should be running for office. “Who does she think she is” and all that.
The class distinction in her case seemed to be partly her slight accent and partly her non-elite schooling.
But I doubt any of that would have mattered had she been a radical feminist. The major distinction in class in our society thus seems to be based on political views. Liberals can be forgiven any and all lapses from appropriate class background. Conservatives are automatically “low class.”
In any case, class in this country has little or nothing to do with parentage or ancestry. Americans just don’t care about that, liberals or conservatives.
Thanks. That's the kind of faint praise I enjoy most.
What countries were we talking about again?
A couple of comments regarding Ben’s quote, to put things in context...
He asserts that “society” should get to decide what to do with the “superfluous” property, including, I imagine, what constitutes “superfluous”... But who is “society”?
Well, according to Wikipedia...
“When founded, most U.S. states allowed only Caucasian maleswho either owned property (i.e., at least 50 acres of land), or, had taxable incomesto vote.”
In other words, property owners were the ones that defined property rights and what is superfluous. Well given that, I would not have a whole lot of disagreements with ol’ Ben.
So I will gladly accept the idea that society gets to decide what should be redistributed, PROVIDED, the left also accepts that only property owners get to vote and make those rules.
I can guarantee you that under that system, the amount of redistribution would be way, way less than we have today.
Right. Many people have expressed rather intemperate private opinions that never make it into policy. Franklin was never shy about mouthing provocations, especially as he was afflicted with painful gout during his later years. The people to fear are those others who succeed in injecting their personal musings into law.