It might not come as a surprise to many that Bill Gates, whom Forbes’ magazine ranks as the second wealthiest man in the world, doesn’t agree with the ideas of French economist Thomas Piketty.
It’s Piketty, after all, who made a big splash this year with his book Capital in the 21st Century, which argued that it is a fundamental law of capitalism that wealth will grow more concentrated absent destabilizing events like global wars. Piketty’s solution? A global tax on capital that could help governments better understand how wealth is distributed and stem the tide of inevitably increasing inequality, which Piketty believes is socially destabilizing.
If you believe the Forbes list, there is nobody in the world besides Carlos Slim who has more to lose than Bill Gates if Piketty’s global tax on wealth were to be instituted. But Gates’ critique of Piketty’s work, published Monday on his personal blog, isn’t completely self-interested. After all, Gates has already pledged to give away half his fortune over the course of his lifetime, a much larger amount than the 1% or 2% wealth tax, proposed by Piketty, would confiscate. His problem isn’t with the idea that the super wealthy should spread their fortunes around, but ratherwith Piketty’s mechanism and the incentives it would create:
Gates shares Piketty’s goal of spreading wealth, yet he doesn’t want to discourage the uber wealthy (like Gates) who are taking risks, investing in value-creating businesses, and helping the world through philanthropy. Gates’ solution? Shift the American tax code from one that taxes labor to one that taxes consumption. Now, this sounds like standard, right-wing economic theory. Consumption taxes are usually favored by the wealthy and by conservative economists because they tend to be regressive in nature. Since everyone—rich and poor—have to consume some amount of goods and services, and because the proportion of income spent is much higher for the poor than the rich, consumption taxes like state and local sales tax burden the poor more than the rich.
But this doesn’t necessarily have to be the case. Economists like Cornell University’s Robert Frank have long advocated for progressive consumption taxes that could do much to solve what they perceive as the ills of growing income inequality. As Frank writes:
As you can see, one of the strategies behind this tax regime is to reduce the incentive to consume. With less conspicuous consumption, the poor would suffer from the negative effects of having less than those around them. As many behavioral studies have shown, relative wealth has more of an impact on personal happiness than absolute wealth.
Such a regime could appeal to both the right and left sides of the political spectrum. For those on the left, who are sometimes uncomfortable with the effects of a culture based around consumption, this tax would discourage such behavior. Meanwhile, a regime that encourages savings and investment would appeal to conservatives.
But for a progressive consumption tax to be truly progressive, there would need to be a hefty estate tax to prevent the rich from simply letting their wealth grow over generations through interest income. But Gates argues this is not a problem, because we have the ability to institute estate taxes, a policy which he is a “big believer” in.