0.4 Income distribution  (Page 16/18)

The Piketty Proposals for enactment of very high rates of income and wealth taxes overlook the large public finance literature on the positive relationships between income tax rates and tax evasion and avoidance. One of the latest of these contributions shows that attempts to reduce budget deficits with corporate tax rate increases tends to be offset by an increase in activities in the shadow economy. Denvil Duncan&Klara S. Peter, (2014, June), “Switching on the Lights: Do Higher Income Taxes Push Economic Activity into the Shade?” National Tax Journal , 67(2): 321-350. See also the list of over 40 references on this topic in this article.

Indeed, in the decades since 1980 dozens of nations, including the U.S., much of Europe, and many emerging nations have sharply reduced top rates of personal and corporate income taxes Malcolm Gillis, Dwight H. Perkins, Michael Roemer&Donald R. Snodgrass (5th Edition, 2006). Economics of Development , New York, NY: W.W. Norton&Co. (see Chapter___) in recognition of both economic and administrative difficulties in attempting to enforce sharply progressive rates of tax. Notably, the Socialist Government of Piketty’s home country, France, abandoned as fruitless in 2014 an attempt to impose a 75% rate of tax on top incomes (above 1 million Euros).

The decline in rates was worldwide. In a sample of 189 nations from 1981 and 2005, the top statutory marginal rate of the personal income tax declined from 62% to 36%. In addition, the top statutory rate for corporate income taxes declined from 44.6% to 30.5%.

Piketty’s proposals for a very high rate of net wealth tax (___%) are even more unrealistic than that for income tax rates, and flies in the face of several decades of experience with this tax.

Prior to the 1980s, several European nations, Canada, and Colombia imposed net wealth taxes. But especially since 1990, most European nations have abandoned this type of tax. Austria and Denmark repeated the tax in 1995, Germany did so in 1977, and Luxemburg Michael Forster, Ana Llena-Nozal,&Vahe Nafilyan (2014), “Trends in Top Incomes and their Taxation in OECD Countries”, OECD Working Paper No. 159. and Finland abolished it in 2006 and Sweden in 2007. Wikipedia (Retrieved from: (External Link) , on 9-23-2014). Colombia Adrian Rodriguez, “Net Worth Tax in Colombia: Past and Future”. In progress 2015 pending publication. used a net wealth tax from 1937 to 1992, when it was eliminated. During a reverse crisis, the tax was reintroduced in 2003, but imposed at a rate of only 0.3% (compared to the Piketty proposal of ___%).

The Colombian Government proposed a restructuring of the wealth tax in 2014, a proposal reported here to illustrate real world rate structures for the tax. A rate of 0.2% applies to the first US$1 million in wealth. The applicable rate for the next US$500,000 is 0.35, with a maximum marginal rate of 1.5%, so that the average rate on net worth exceeding US$2.5 million is less than 1%.

Rates for all countries are included in Table 4-3. There it can be seen that in no country does the tax rate exceed 2.5%, and that is in Spain, a nation with notoriously poor tax administration. But in no case do rates approach those proposed by Piketty, and for good reason.