Defending Piketty against His Critics

There has been a critique against Piketty’s Capital in the Twenty-First Century (2014), by Philip Magness and Robert Murphy, and I defended Piketty’s argument in a Facebook post:

There was a Kopczuk and Saez study in 2004, looking at the estate tax data claiming a falling share for the top 1%, and this data, which Magness cites, apparently undermines the claim of Piketty. But why would you want to take estate tax data, when the rich have cleverly worked to undermine the estate tax. Congress kept on passing exemptions for the estate tax, and so the estate tax can’t fully capture the amount of inequality (Figure 4)

Magness points out that for the US, Piketty there are missing data points on the total tax as share of national income between 1870 and 1900 (Figure 2). Okay, Piketty should have left that part empty and not extrapolate, but I would like to read Piketty’s own response if he ever cared to respond (probably not).

In Figure 5, Magness attacks Piketty for picking and choosing data from different studies, but I don’t necessarily find that problematic if the methodology is the same for each.

Figure 14 shows that North America has a flatter U-shape curve of the capital-income ratio than Europe. But there is still a U-shape.

It is good that Piketty’s work has been critiqued, but I still don’t see the fundamental argument challenged. There has been growth in inequality, and much of it is not properly accounted for, because there is no world police to track down the wealth of the rich. The US IRS has tried to go after Swiss bank account holders that are US citizens, and there was some success there, but these are happenstance events, and haphazardly enforced.

Magness ironically makes fun of Piketty for demanding a global wealth tax just so he can measure inequality. The analogy is to Freud’s disease of which it purports to be the cure. But there is some truth to Piketty’s point. Most working people account their entire earnings to the IRS on an annual basis. Most middle class people do the same, because they (1) want to get some taxes back from the government (refund), and (2) their earnings derive from wages, which are deducted automatically from the payroll. For this group of people, the IRS data pretty accurately captures their earnings and possessions. For big investors and corporate bosses, the tax story is different: they are too rich to get a refund, and if they do get a refund it is by bribing Congressman to write them a loophole, not via IRS filings. Their earnings are subject to taxation after-the-fact, not before-the-fact like for workers. In other words, the transaction happens, money goes into the pocket of investors and bosses, and then at the end of the year they report their amount to the IRS. If I am a mafia boss, and can count the cash on the table before the tax man comes in, would I not want to first hide half the money elsewhere before I meet the tax man?

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