Saturday, May 17, 2014

Summers: Piketty is right about the past, but the future is ours

I'm tired so I'm not going to analyze now in depth Larry Summers' analysis of Piketty's seminal, once-in-a-generation economic treatise, I'm just gonna say what Summers says Piketty's data should lead us to believe [emphasis mine]:

Perhaps the best way of thinking about Piketty’s wealth tax is less as a serious proposal than as a device for pointing up two truths. First, success in combating inequality will require addressing the myriad devices that enable those with great wealth to avoid paying income and estate taxes. It is sobering to contemplate that in the United States, annual estate and gift tax revenues come to less than 1 percent of the wealth of just the 400 wealthiest Americans. With respect to taxation, as so much else in life, the real scandal is not the illegal things people do—it is the things that are legal. And second, such efforts are likely to require international cooperation if they are to be effective in a world where capital is ever more mobile. The G-20 nations working through the OECD have begun to address these issues, but there is much more that can be done. Whatever one’s views on capital mobility generally, there should be a consensus on much more vigorous cooperative efforts to go after its dark side—tax havens, bank secrecy, money laundering, and regulatory arbitrage.

Beyond taxation, however, there is, one would hope, more than Piketty acknowledges that can be done to make it easier to raise middle-class incomes and to make it more difficult to accumulate great fortunes without requiring great social contributions in return. Examples include more vigorous enforcement of antimonopoly laws, reductions in excessive protection for intellectual property in cases where incentive effects are small and monopoly rents are high, greater encouragement of profit-sharing schemes that benefit workers and give them a stake in wealth accumulation, increased investment of government pension resources in riskier high-return assets, strengthening of collective bargaining arrangements, and improvements in corporate governance. Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.

I'm no fan of Summers, yet his last two prescriptions are, I daresay, things you will never hear discussed in depth on Fox, MSNBC, CNBC, CNN or elsewhere. Wherefore the lib'rul media, indeed!

The only thing I will criticize now, is Summers' argument that "productivity" and "entrepreneurship" explain the outsized gains of U.S. managers. A look at average CEO pay among U.S. corporations and others gives the lie to this argument.  Nobody is arguing that U.S. CEOs are that much better, yet they earn orders of magnitude more than their workers.

As wonkish and un-sexy as it may be, I've talked about this before and will continue to talk about the OECD's effort to fight BEPS (tax base erosion and profit shifting) among global corporations. This is indeed a global problem, not just a U.S. problem, and the U.S. cannot hope to solve it in isolation, but must nevertheless play a leading role in ending this global "race to the bottom."

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