Tags: Shiller | inequality | insurance | tax

Yale's Shiller: Inequality Insurance a Better Idea Than a Wealth Tax Is

By    |   Thursday, 15 May 2014 12:23 PM

Thomas Piketty's book on income inequality, "Capital in the Twenty-First Century," is "impressive" but offers the wrong solution, says Nobel laureate economist Robert Shiller of Yale University.

Even Piketty admits that his proposed wealth tax "would require a very high and no doubt unrealistic level of international cooperation," Shiller notes in an article for Project Syndicate.

"We should not be focusing on quick solutions," he writes. "The really important concern for policymakers everywhere is to prevent disasters. . . . And, because inequality tends to change slowly, any disaster probably lies decades in the future."

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000


To be sure, Shiller maintains that "some substantial degree of inequality is economically healthy."

And why is that? "The prospect of becoming rich clearly drives many people to work hard. But massive inequality is intolerable."

Shiller's solution is inequality insurance. The idea is for governments to create long-term plans that would automatically increase income taxes for the wealthy only if inequality worsens.

"I called it inequality insurance because, like any insurance policy, it addresses risks beforehand," he explains. "We have to deal with the risk of inequality before it becomes much worse and creates a powerful new class of entitled rich people who use their power to consolidate their gains."

Obviously governments are capable of ignoring their own inequality-insurance plans. "But they are more likely to follow such plans if they are already legislated and take effect gradually, according to a formula known in advance, rather than suddenly in some revolutionary departure from past practice," Shiller argues.

As for a wealth tax, it would have to be implemented globally, "otherwise, the rich would simply emigrate to whichever country has the lowest tax rates."

Many people would view a wealth tax that was implemented immediately as unfair, because it retroactively taxes work performed in the past, he notes. "Older people who worked hard to accumulate wealth over the course of their lifetime would be taxed on their frugality to benefit people who didn't even try to save."

Shiller's income tax increases could be based on average income over a period of years, rather than just the present, and could permit deductions for investments. That would avoid "penalizing those who saved more to accumulate more wealth," he adds.

Meanwhile, Harvard economist Martin Feldstein offers stronger criticism of Piketty than Shiller does.

"Although his [Piketty's] book has been praised by those who advocate income redistribution, his thesis rests on a false theory of how wealth evolves in a market economy, a flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household wealth," Feldstein writes in The Wall Street Journal.

High incomes aren't a problem in the United States, he says.

"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."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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Thomas Piketty's book on income inequality, "Capital in the Twenty-First Century," is "impressive" but offers the wrong solution, says Nobel laureate economist Robert Shiller of Yale University.
Shiller, inequality, insurance, tax
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2014-23-15
Thursday, 15 May 2014 12:23 PM
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