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Income tax rate increases

Arguments for sharp increases in top rates of income tax as well as enactment of a new global tax on capital were presented in 2014 by Thomas Piketty in a widely purchased book, Capital in the Twenty-First Century. This 677 page book was on the non-fiction New York Times best seller list for 10 weeks in 2014, and moved nearly to the top of the list for two of these. The central claim of his book is that wealth inequality in the rich world has been increasing rapidly since the 1970s.

Piketty maintains that the degree of income and wealth inequality in the U.S. and Europe in 2008 is similar to that of a century ago. In fact, in Europe in 1900, the top 10% of households received 45% of all income. As it happens, the top 10% of households in the U.S. captured 45% of all income in 2010.

A main theme of his book is that a century ago, the high degree of income inequality was due to dividends and other returns to capital flowing differentially to the top 10%. We will see that he attributes much of recent inequalities to quite another set of factors.

As discussed in more detail in the Appendix to Chapter 4 Piketty’s studies of the historical dynamics of wealth and income leads him to conclude that rates of personal income tax in, say the U.S. should be raised to 80% for incomes above $500,000. Indeed Piketty goes so far as to say that “the optimal top tax rate in developed countries is probably above 80%.” Thomas Piketty, Capital in the 21st Century , p. 512 This compares to a top rate of tax of 38% in 2010 and 44% in 2014 in the U.S.

Wealth taxes

Piketty also proposes a worldwide wealth tax in order to increase progressively of taxes in general and to decrease wealth inequality in particular. It is noteworthy that the wealthy developer Donald Trump proposed in 1999 a National Wealth Tax of 14.25% on the net wealth of people with assets in excess of U.S. $10 million. He proposes a progressive global tax on capital that would involve a maximum tax rate of perhaps 10% on the largest fortunes. In the few nations that still impose a wealth tax, the maximum rate is 2.5%, (Spain). This proposal appears after several decades wherein developed nations; with only a few exceptions, have abolished the wealth taxes they had in place in the 1960s.

The history of National Wealth taxes since 1965 suggests strongly that proposals for worldwide wealth taxes are poor. In the U.S., the constitution prohibits any direct federal tax on asset holdings; unless the revenues are divided up among the states on a per capita basis. Before 1985, thirteen member nations of the OECD taxed net wealth. Austria, Denmark, Canada, Finland, France, Germany, Iceland, Luxemburg, Netherlands, Norway, Spain, Sweden, and Switzerland.

As noted in the Appendix to this Chapter, by 2012, eight of these nations had abolished the net wealth tax, so that it remains in force only in France, Netherlands, Norway, Spain and Switzerland. See Michael Förster, Ana Llena-Nozal&Vahé Nafilyan (2014), "Trends in Top Incomes and their Taxation in OECD Countries", OECD Social, Employment and Migration Working Papers , No. 159, Paris, France: OECD Publishing. Few developing nations have adopted net wealth taxes; even fewer have collected significant revenues from the tax. Colombia featured a net wealth tax from 1935 Richard Musgrave&Malcolm Gillis (1971), Fiscal Reform for Colombia , Cambridge, MA: Harvard Law School, International Tax Program, pp.416-417. to at least 2010, while India imposes a small net wealth tax levied at a 1% rate, but exemptions are substantial.

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Source:  OpenStax, Economic development for the 21st century. OpenStax CNX. Jun 05, 2015 Download for free at http://legacy.cnx.org/content/col11747/1.12
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