What do you think about the growing wealth gap in our society? Should this issue be addressed?
According to Thomas Piketty, inequality of wealth can be dealt with. In his book Capital in the Twenty-First Century, he proposes three key economic reforms to reduce wealth inequality: a global wealth tax, increased financial transparency, and progressive taxation.
Continue reading to understand Piketty’s ideas and their implications for society.
Thomas Piketty’s Solutions to Wealth Inequality
Wealth inequality can erode faith in democratic institutions because it exacerbates social divisions and convinces people that political and economic systems have turned their backs on them. That’s why addressing the challenge of wealth inequality isn’t important only from an economic point of view—it’s vital to the preservation of a democratic society. According to Thomas Piketty, inequality of wealth can be minimized by taking several concrete steps:
- A global wealth tax
- Transparency in the international financial system
- Progressive taxation
1) A Global Wealth Tax
Piketty argues that, since the 1980s, wealth inequality has made a troubling comeback that demands a response. His proposed solution is a global wealth tax.
Such a tax would be progressive, with higher fortunes taxed at a higher marginal rate than smaller fortunes. The tax would be relatively low (perhaps 1-2% of net worth per year) and would be assessed annually on the combined net worth of market assets of all asset classes.
Piketty argues that the purpose of the tax would not be to raise revenue. Instead, its purpose would be to stop the unchecked accumulation of wealth by the global hyper-wealthy, end the financial opacity that allows so much of the world’s wealth to exist in the shadows, and bring some much-needed redistribution of economic resources.
2) Greater Financial Transparency for the Global Financial System
Piketty further argues that even the assessment of such a tax would bring great clarity to the global financial system, as it would show precisely who owns what assets, how unequally wealth is distributed, and what policies might be best suited to address it.
The assessment of the global wealth tax would require significant (and unprecedented) sharing of banking data between countries and cooperation between tax authorities. But this degree of transparency would enable countries to accurately calculate the net worth of each of their citizens—regardless of where those citizens choose to hold their assets—and significantly cut down on tax evasion.
3) Progressive Taxation
Piketty argues that progressivity—in which the tax burden falls most heavily on society’s wealthiest—is necessary for the tax system to function fairly. He writes that if the system instead taxed the wealthy at lower rates and the poor at higher rates, middle- and working-class people (who vastly outnumber the rich) would rightly begin to question why they should pay a higher share than the rich.
Piketty notes that progressivity encompasses more than just the taxation rates applied to income. Progressivity also comes from the kind of income being taxed. In particular, taxes on wealth and inherited wealth (both of which are forms of capital income) especially could be powerful tools for scaling back the wealth inequality that’s defined most developed countries for the past 40 years.
