http://online.wsj.com/news/articles/SB10001424052702304081804579557664176917086?mod=hp_opinion&mg=reno64-wsj
Here are key sections of his opinion article:
His conclusion about ever-increasing inequality could be correct if people lived forever. But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.
The result is that total wealth grows over time roughly in proportion to total income. Since 1960, the Federal Reserve flow-of-funds data report that real total household wealth in the U.S. has grown at 3.2% a year while the real total personal income calculated by the Department of Commerce grew at 3.3%.
The second problem with Mr. Piketty's conclusions about increasing inequality is his use of income-tax returns without recognizing the importance of the changes that have occurred in tax rules. Internal Revenue Service data, he notes, show that the income reported on tax returns by the top 10% of taxpayers was relatively constant as a share of national income from the end of World War II to 1980, but the ratio has risen significantly since then. Yet the income reported on tax returns is not the same as individuals' real total income. The changes in tax rules since 1980 create a false impression of rising inequality.
And here is his conclusion:
The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.
Martin Feldstein's response to Picketty's book, to a very large extent, seems very flawed. The figures that he quotes to show a change in household wealth and income are heavily influenced by outliers (by the 1% that have very huge income that assists in their ability to accumulate wealth in comparison to the 99%). Feldstein's comment also illustrates the rising inequality as a phase that the economy is going through, and that this inequality will eventually fade out on its own in the future. This is not the case since there are institutions, such as banking, that seem to protect and enhance the incomes of the wealthy whilst the majority see a stagnant or reduction in their incomes. This means that those individuals with low or no incomes are unable to accumulate wealth.
ReplyDeleteAdditionally, Feldstein points out that the changes in tax regulations should take care of the rising inequality. However, as we have been discussing for the past week or so, the inability to effectively and efficiently implement those tax rules have to some extent contributed to the growing inequality. The middle and lower class have been paying more taxes in comparison to the reach. The Inequality documentary we watched a few weeks ago revealed that the middle class paid approximately 35% of their income in taxes whereas the upper class paid less than 15%. As a result, the tax system has not been effective in reducing or slowing down the rising inequality. There is need for a new tax system that enables the government to raise enough revenue to spend in the economy, even if that means "confiscatory taxes on income and wealth" that Feldstein is against.
"The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck." This statement is contradicting to the conclusions of the inequality video we watched in the class. The top income earners are not putting their wealth into the economy, which is a big reason why we are not growing at higher rate and contributing to the inequality in some way.
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