The Piketty Problem: Why taxing the rich won’t solve inequality
FORTUNE — It’s not often that a lengthy economics book gets very much attention, but by now, many have heard of French economist Thomas Piketty’s Capital in the Twenty-First Century. The 685-page book has unexpectedly become a bestseller; Piketty analyzes hundreds of years of tax records throughout the world and arrives at a harsh reality: The rich are indeed getting richer.
A lot of attention has been paid to incomes, but as Piketty highlights, the divide is much wider when it comes to wealth. While he has broadened the debate about inequality, what’s often been missing from the discussion is what should we do about it?
At least in the U.S., the prescriptions have overwhelmingly focused on raising incomes; hardly a day goes by when the media, a city mayor or Washington lawmakers make the case for raising workers’ minimum wage. While that might help equalize incomes, it does nothing to help Americans build wealth.
Piketty suggests levying a global wealth tax, but taxing the rich isn’t necessarily the answer. What could help average Americans, particularly low-income households, is policies that help them build wealth by helping people to save more. This is an approach recently articulated by my New America Foundation colleague, William Elliott. In his report, Harnessing Assets to Build an Economic Mobility System, he argues that the richest Americans already enjoy extensive government subsidies on their savings. This year, the top 20% of income earners will capture two-thirds of the $140 billion in subsidies for retirement, according to estimates by the Congressional Budget Office.
Lower-income Americans don’t have this type of support. In fact, they’re explicitly discouraged from saving more if you look at rules over federal food and income assistance programs that can make families with less than $1,000 in the bank ineligible to participate.
As a result, higher income families are rewarded for long-term planning and investment and low-income families are penalized for doing so. The point is that it takes money to make money, so how about making sure that everyone starts out with some?
There are multiple ways: Senator Ron Wyden (D-OR) has recently voiced his support for a universal savings accounts for children, modeled on the ASPIRE Act. ASPIRE would provide all children born in the U.S. with a $500 savings account that could be put toward the cost of college, buying a home or retirement. Up to $2,000 could be deposited into the account annually on a tax-free basis, and lower-income families would quality for a federal match of up to $500 a year. Representative Joe Crowley (D-NY) has supported a similar approach.
There are certainly other measures that need to take place to make sure that an approach like that is successful, such as getting rid of asset limits that cast savings as a liability in the minds of low-income families, as well as helping families build a financial cushion in the form of flexible savings, as the Financial Security Credit would do.
As Piketty rightly observes, the continued consolidation of wealth is deeply problematic. This is true on a macro scale as well as in the day-to-day lives of families trying make ends meet and get a few steps ahead. Replacing our flawed public policies that exacerbate this problem with a system that facilitates the creation of new wealth would go a long way toward allowing more Americans to share in such a powerful driver of economic success.
Rachel Black is a senior policy analyst in the Asset Building Program of the New America Foundation.