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When Piketty Came to America
The French economist found that concentrated wealth drives income inequality. That means the U.S. has its policy all wrong.
By ANDREA LEVERE and EZRA LEVIN
April 28, 2014
The top-selling book on Amazon.com right now, amazingly enough, happens to be a 696-page treatise on economic history written by a Frenchman. It’s the talk of the town in Washington and even a hot topic on cable news. The book, “Capital in the Twenty-First Century,” by economist Thomas Piketty, has been called “the most important economics book of the year — and maybe of the decade” by New York Times columnist Paul Krugman, its stunning findings chewed over by pundits on the left and right. But all the buzz has missed a fundamental implication from Piketty’s work: America’s public policies devote billions of dollars to an asset welfare system that helps some build wealth, while leaving most working families behind. Piketty’s book is a meticulously researched argument in favor of turning these upside-down policies right-side up.
Piketty offers a surprisingly simple explanation for the huge spike in income inequality in developed countries over the past few decades. He finds that the rate of return on capital — homeownership, business ownership, stock, bonds and everything that makes up a household’s net worth — has regularly outpaced the growth of income. Income tends to grow at 2 to 3 percent annually, while capital tends to grow at 4 to 5 percent each year. Because capital is concentrated among wealthier households, inequality has increased over decades to the levels we are now seeing..
This is a particular problem in countries where wealth is distributed very unequally. In the United States, the top 1 percent of the population owns more than 35 percent of the wealth — more than the entire bottom 90 percent combined. In fact, our nonprofit organization, the Corporation for Enterprise Development, has found that 44 percent of U.S. households have almost no savings. These “liquid asset poor” families are not only missing out on the returns from wealth — they’re one economic shock away from financial disaster.
It is no surprise that a French economist like Piketty proposes solutions that are political nonstarters in this country, such as a redistributive global tax on wealth. Like Piketty, many U.S. economists and policymakers focus their attention on the concentration of wealth at the top. But a more pragmatic starting place should be looking to see what we can do to help low- and moderate-income working families save, invest and build wealth from the bottom up.
The federal government alone spends more than $500 billion annually to encourage Americans to save, invest and build wealth. But the vast majority of this support goes to high-income households through tax spending on asset support — for instance to buy a house (mortgage interest and property tax deductions), invest in stocks (reduced rates on capital gains) and save for retirement (exclusion for 401(k) and IRA contributions). This is essentially welfare targeted at high-income households.
By contrast, welfare for low-income households tends to come as income support for everyday expenses, such as to pay for food (the Supplemental Nutrition Assistance Program), rent (Section 8 vouchers) and health insurance (Medicaid).
In other words, government spends to help low-income families just get by, and it spends to help high-income families get further ahead. Piketty found that concentrated wealth is the driving force behind income inequality, and federal policy is actively concentrating that wealth.
Some may argue that working families do not receive benefits for saving and investments because these families are unable to save or invest. But decades of research proves otherwise. The American Dream Demonstration, for instance, a nationwide research project on savings for working families, showed that even the lowest-income families will save toward their goals of college, home and business ownership if provided with the right opportunities and incentives. And a rigorous study of New York City’s $aveUSA program has found that low-income tax filers will save a significant portion of their refund to serve as a personal safety net.
There’s no shortage of ideas for new asset-based policies. Children’s Savings Account programs, which help children start building assets early in life, have launched throughout the country and congressional leaders have committed to supporting legislation to provide every child born in the country with a savings account.
Other asset-based proposals would expand and make refundable the Saver’s Credit — a rare retirement savings tax expenditure targeted to low- and moderate-income households. Policymakers are also working to remove asset limits from public benefit programs so families don’t have to choose between building wealth and receiving benefits that help them make ends meet. (In many states, a parent who saves as little as $1,000 or $2,000 in a savings account for themselves or for their kids risks getting kicked off of public benefits.)
These incentives and reforms won’t help if families lack access to saving vehicles. To tackle this issue, California and Illinois are exploring a policy called Automatic-IRA to guarantee that families without an employer-sponsored retirement plan can save for the future. And President Barack Obama recently announced the myRA, a U.S. Treasury-sponsored account aimed at removing barriers to retirement savings by creating a simple, safe and affordable retirement savings product for working families.
Our upside-down Tax Code and asset policies strongly encourage savings and investments by the wealthy and do little for most working families. Piketty’s work shows us that if we want to stem the growing tide of inequality, we need to fix those policies. But we don’t have to enact radical global tax schemes. All we need to do is turn the system we do have right-side up.
Andrea Levere is president of the Corporation for Enterprise Development (CFED).
Ezra Levin is federal affairs manager of CFED.
Read more:
http://www.politico.com/magazine/st...me-to-america-106034_Page2.html#ixzz30wvfe6Sa
