Taxing capital will have minimal effects if most land-use policy makes housing more scarce and expensive.
Everyone frets about income inequality. It is the cause of the season, and should be. Its burdens are felt by every working soul and exploited by every I-feel-your-pain politician. We have developed an economy where two-thirds of the populace are condemned to a steady erosion of their standing, while the top fly ever higher. Disparity grows by the day, seemingly not to be stopped, and this has profound social, economic and political ramifications.
“The American economy has not worked for the average family since the end of the Clinton administration. Adjusted for inflation, median earnings of men working full-time year-round are where they were in 1980,” wrote publisher Mortimer Zuckerman in U.S. News & World Report last month. “ … In 1944 the top 1 percent earned 11 percent of all income. By 2012, it was 23 percent of the nation’s income. The mismatch between reward and effort makes a mockery of the American dream.”
This observation is not new. Few argue the existence of the problem. Many argue about its cause, and many more argue about what can be done. The remedy most prescribed is to reduce wealth on the top through progressive taxation. The graduated federal income tax does have the desired effect, to a degree, reports the Brookings Institution. Income disparity is less after taxes. The capital-gains tax proposed in Washington state has the same design. This may satisfy some, but in the end it is treating the symptom and not the disease. There also is the overriding political temptation to, in effect, take money from your enemies and give it to your friends. Intentionally or coincidentally, that’s one effect of boosting government budgets by raising taxes on small numbers of convenient people. In the alternative, you can press to raise the minimum wage, which produces a beneficial effect for surviving workers by raising prices for their not-so-rich formerly employed customers.
The discussion of this intractable problem took another interesting turn recently with a blog comment followed by a formal academic paper by a 26-year-old MIT graduate student from West Linn, Ore., named Matthew Rognlie. It is young Rognlie who issued one of the most effective and noticed critiques of French economic inequality theorist Thomas Piketty, author of “Capital in the Twenty-First Century,” considered one of the most important and influential books of the century. Piketty says (I summarize summaries, having not yet read the book), writes The Economist, “Over the long run the rate of return on wealth exceeds economic growth. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labor (everyone else) falls.” The value of investment goes up, while the value of work goes down.
Rognlie, in a paper titled “Deciphering the fall and rise in the net capital share,” says “capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital’s share of total income.” Moreover, Piketty doesn’t mention that wealth is invested in a lot of things that lose value quickly, like software and intellectual property. The rise in income inequality, says Rognlie, is due almost entirely to the cost of housing. Outside of housing, capital’s gain as a share of the economy has been spotty. It actually peaked in the late 1970s or early 1980s, he said.
Piketty has many fans, but Rognlie has turned many influential heads. In the quest to treat income inequality, his thesis has important implications for public policy. Taxing capital will have minimal effects if most land-use policy makes housing more scarce and expensive. Look to San Francisco for examples. And the rich get richer.