the decades before the Great Depression, the top 1 percent received around 18 percent of total income and owned about 45 percent of total wealth. Those figures fell to around 10 percent (share of income) and 30 percent (share of wealth) between 1930 and 1980, at which point these shares started to grow again. As of 2010, the top 1 percent in the United States received nearly 18 percent of total incomes and owned about 35 percent of the total wealth. The pattern is similar for the top 10 percent of the income and wealth distributions. Before the Great Depression, from 1910 to 1930, this group claimed about 45 percent of national income and between 80 percent of the wealth; between 1930 and 1980, those shares fell to roughly 30 percent (income) and 65 percent (wealth); and from 1980 to 2010 their shares increased again to between 40 and 50 percent (income) and 70 percent (wealth). Piketty also shows that the super-rich, the top one-tenth of 1 percent of the income distribution (about 100,000 households in 2010), increased their share of national income from about 2 percent in 1980 to nearly 8 percent in 2010. The patterns are similar in the other Anglo-Saxon countries—Great Britain, Canada, and Australia—but very different in continental Europe, where the wealthiest groups have not been able to reclaim the shares of income and wealth that they enjoyed before World War I.
There is little mystery as to the sources of the U-shaped curves in income and wealth distribution in the United States and the flatter curves in continental Europe. In Europe in particular, the two great wars of the first half of the twentieth century, combined with effects of the Great Depression, wiped out capital assets to an unprecedented degree, while progressive taxes enacted during and after World War II made it difficult for the wealthiest groups to accumulate capital at the same rates as before. In the United States, the Depression wiped out owners of stocks, and high marginal income tax rates (as high as 91 percent in the 1940s and 1950s) similarly made it difficult for “the rich” to accumulate capital. Beginning in the 1980s, as rates were reduced on incomes and capital gains, especially in the United States and Great Britain, those old patterns began to reappear.
Piketty highlights a new factor in wealth distribution since the 1980s: the dramatic rise in salaries for “supermanagers,” which he defines as “top executives of large firms who have managed to obtain extremely high and historically unprecedented compensation packages for their labor.” This group also includes highly compensated presidents and senior executives of major colleges, universities, private foundations, and charitable institutions, who often earn well in excess of $500,000 per year. Surprisingly, then, “the rich” today are likely to be salaried executives and managers, rather than the “coupon clippers” of a century ago who lived off returns from stocks, bonds, and real estate. “The 1 percent,” in other words, are people who work for a living.
Piketty doubts that these supermanagers earn their generous salaries on the basis of merit or contributions to business profits. He also rejects the possibility that these salaries are in any way linked to the rapidly growing stock markets of recent decades. He points instead to cozy and self-serving relationships that executives establish with their boards of directors. In a sense, he suggests, they are in a position to set their own salaries as members of a “club” alongside wealthy directors and trustees.
To alleviate the growing inequality problem, Piketty advocates a return to the old regime of much higher marginal tax rates in the United States and Europe. He thinks that marginal rates in the United States could be increased to 80 percent (from 39.5 percent today) on the very rich and to 60 percent on those with incomes between $200,000 and $500,000 per year without reducing their productive efforts in any substantial way. Such taxes would hit the so-called supermanagers who earn incomes from high salaries, though it would not touch the owners of capital who take but a small fraction of their holdings in annual income.
As a remedy for this problem, Piketty advocates a global “wealth tax” on the super-rich, levied against assets in stocks, bonds, and real estate. He acknowledges that such a tax has little chance of being imposed globally, though he hopes that at some point it might be applied in the European Union. Several European countries—Germany, Finland, and Sweden among them—had a wealth tax in the past but have discontinued it. France currently has a wealth tax that tops out at a rate of 1.5 percent on assets in excess of ten million euros (or about $14 million). The United States has never had such a tax, and in fact it may not be allowed under the Constitution (which authorizes taxes on incomes).
Wealth taxes are notoriously difficult to collect, and they encourage capital flight, hiding of assets, and disputes over pricing of assets. They require individuals to sell assets to pay taxes, thereby causing asset values to fall. Piketty thinks that a capital tax would have to be global in scope to guard against capital flight and the hiding of assets in foreign accounts. It would also necessitate a new international banking regime under which major banks would be required to disclose account information to national treasuries. Under this scheme, a sliding-scale tax would be imposed, beginning at 1 percent on modest fortunes (roughly between $1.5 and $7 million) and perhaps reaching as high as 10 percent on fortunes in excess of $1 billion. Wealthy individuals like Bill Gates and Warren Buffett, with total assets in excess of $70 billion each, might have to pay as much as $7 billion annually in national wealth taxes. In the United States, with household wealth currently at around $80 trillion, such a tax, levied even at low rates of 1 or 2 percent, might yield as much as $500 billion annually. The purpose of the tax, it should be stressed, is to reduce inequality, not to spend the new revenues on beneficial public purposes.
Piketty implies that reductions in taxes over the past three decades have allowed “the rich” to accumulate money while avoiding their fair share of taxes. This is not the case at all, at least not in the United States. As income taxes and capital gains taxes were reduced in the United States beginning in the 1980s, the share of federal taxes paid by “the rich” steadily went up. From 1980 to 2010, as the top 1 percent increased their share of before-tax income from 9 to 15 percent, their share of the individual income tax soared from 17 to 39 percent of the total paid. Their share of total federal taxes more than doubled during a period when the highest marginal tax rate was cut in half, from 70 to 35.5 percent. The wealthy, in short, are already paying more than their fair share of taxes, and the growth in their wealth and incomes has had nothing to do with tax avoidance or deflecting the tax burden onto the middle class.
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Piketty’s estimates of wealth and income shares over the decades are probably as reliable and accurate as he or anyone else could make them, but even so they are estimates based on imperfect and inexact data often interpolated or extrapolated from entries in government records. This is especially true of his information on wealth, since governments have long maintained records on incomes (to collect taxes on incomes) but not on individual wealth. Following the publication of his book, many analysts challenged the accuracy of his data on the distribution of wealth in Great Britain and the United States. It will take some time to sort out these criticisms as other researchers attempt to replicate his analysis and as Piketty himself replies to his critics.
Even where Piketty’s numbers may be accurate, they can still lead to faulty conclusions. As some critics have pointed out, he uses statistics on national income as denominators for his calculations of shares of income claimed by various groups of the population, but these figures exclude transfers from government such as Social Security payments, food stamps, rent supplements, and the like, which constitute a growing portion of incomes for many middle- and working-class people. If those transfers were included in the calculations, then the shares of income claimed by the top 1 percent or the top 10 percent would undoubtedly decline, and the shares of other groups would correspondingly increase.
Leaving these controversies aside, and accepting Piketty’s data as valid for the time being, there are nevertheless good reasons to question his basic conclusions about capitalism in the twentieth century. He claims that inequality has increased since 1980, especially in the United States and Great Britain, that this kind of inequality is built into the nature of capitalism, and that it has been exacerbated by new tax policies that have cut the levies on high incomes and great wealth. These claims are greatly exaggerated.
