Modeling Piketty’s Tax Proposal

French economist Thomas Piketty received national attention when he called for a global wealth tax in his best-selling book, “Capital in the Twenty-First Century.” Piketty also suggests that the United States impose a top personal income tax rate of 80 percent on incomes above $5 million and a tax rate of 50 to 60 percent on incomes above $200,000.

Michael Schuyler of the Tax Foundation decided to run the numbers on Piketty’s tax proposal. According to Schuyler’s analysis:

– Taxing income at top rates of 80 percent and 55 percent would cause a drop in GDP of 3.5 percent, a 1.6 percent decrease in wages and a 7.4 percent fall in capital stock.
– There would also be 2.1 million fewer jobs in the U.S. economy.

The Piketty proposal is not clear on whether the tax rates apply to capital gains and dividends. If they do:

– GDP would fall 18.1 percent (equivalent to $3 trillion), GDP would be 42.3 percent smaller than it otherwise would be, and wages would be 14.6 percent lower.
– The United States would lose 4.9 million jobs, and the government would lose $250 billion in revenue.
– The poor and middle class would see a 17 percent drop in their after-tax incomes.

Schuyler explains that wages fall due to these taxes because they reduce capital, and workers need capital (such as equipment) to be more productive and, thus, receive higher wages. Moreover, when businesses grow slowly and innovate less, fewer jobs are available in the economy.

Why does Piketty think that the tax rates will work? Schuyler explains that Piketty believes that the wealthiest Americans are insensitive to marginal tax rates, believing that they will continue to work and invest at the same rate, despite new and exorbitant taxes on their income. This view, writes Schuyler, “strains credulity.”

In a related paper, NCPA Senior Fellow Richard McKenzie and Kathryn Shelton, research associate at the O’Neil Center for Global Markets and Freedom, authored a study debunking many of Piketty’s claims regarding income inequality.

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