Thomas Piketty says economic inequality has been getting greater in the world, and will get greater. What about New Zealand?
Pundit: 28 October, 2014
Keywords: Distributional Economics; History of Ideas, Methodology & Philosophy;
Paul Krugman has said “Thomas Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to”. Many other eminent economists have said much the same thing. If they are right economics is going through a paradigm shift – a change in the way the discipline (and the public at large) thinks and the issues which it addresses.
It is hard in the middle of a paradigm shift to know what exactly is happening. The stories we tell about previous shifts is that a great man or women had an idea, they published it, and it was immediately adopted by the entire profession. Histories show that in fact each transition was much more muddled, and those in the middle of the longish period over which it took place were often puzzled about what was new, what was important, and how the new paradigm reconciled with the known facts or suggested the pursuit of new ones.
The challenge arises because Piketty asks questions about issues which have been almost entirely forgotten by most economists, even if they were once important. Piketty’s book’s title, Capital in the Twenty-First Century, alludes to Karl Marx but before him David Ricardo was intensely interested in how, in modern parlance, GDP was distributed between the social classes.
With a few honourable exceptions, modern economics has largely ignored questions of how income and wealth is distributed. I doubt there are many New Zealand economists who are properly trained in distributional economics. That means New Zealand economics is unlikely to be at the frontier of any paradigm shift. We are excellent at taking up anything fashionable providing it is not too analytically difficult; recall the speed with which we seized on neoliberalism. But when it comes to real revolution we lag decades behind.
All professions find sharp paradigm changes difficult. Some of the critics of Piketty are not just elderly gentlemen (and indeed not so elderly ones) fearful of something they dont understand and concerned their status will be downgraded. There are also those who are acolytes of the rich. While they may not understand the intellectual implications of the Piketty revolution. they certainly understand the way it focuses on their rich clients. Commonly their approach is to misrepresent Piketty’s analysis – it has already happened in New Zealand.
A complication is that Piketty has a theory about the income distribution of the whole world. I have carefully replicated his empirical work in New Zealand and found that, over the last three decades, our Inland Revenue statistics do not show any increase in the share of market incomes of those at the top.
You may at first be surprised. Just about everyone knows that there has been a sharp shift in the after-tax household income distribution. In the early 1980s, the top decile in households, had a 20 percent share; now it is about a 25 percent share. (That is a huge shift.) But that is households not the individuals with which Piketty is concerned. Moreover households may have multiple income recipients and they may have children.
But we are also comparing before-tax with after-tax distributions. We can show the big shift over the thirty years was due to the reductions in income taxes on those at the top, and the slashing of the real level of social security benefits in the late 1980s and early 1990s.
Piketty is not concerned with after-tax incomes but before-tax ones. His thesis is that the income share of the rich is growing because of changes in market and ownership circumstances, not because the tax system is being twisted in their favour (as it has).
Why is there no perceptible change in the income shares of the top of New Zealand’s population – event the top 0.1 percent? My paper suggests two main reasons.
First, there seems to be a growth in trusts following a change in the law in the early 1990s. As far as I know, nobody has systematically studied this. But trusts need not markedly increase inequality.
Second, New Zealanders who live here for less than six months have only their New Zealand income taxed here. Their offshore income is taxed offshore – possibly at a much lower rate. Of course a prudent rich New Zealander will invest a lot of their capital offshore for good financial reasons of portfolio diversification but that is no reason for living somewhere else.
The three ‘New Zealand’ billionaires who appear on the Forbes Rich list – Graham Hart; $5.3b at 229th; Richard Chandler; $2.85b at 502th; Christopher Chandler; $1b at 1342th – are tiddlers compared to those at the top; in any case, they dont live in New Zealand and probably hold only a small share of their wealth here.
I have mixed feelings about whether we should give such a generous exemption. Such people will be treated as New Zealand citizens for many purposes; they may vote, lobby and fund lobby groups, be awarded royal honours and so on. Yet they don’t pay income tax on all their income. As the famous American jurist, Oliver Wendell Holmes, Jr said: ‘Taxes are the price we pay for civilization.’ The unkindly may say that too many of our New Zealand rich are less than half civilised.
The US has begun to chase up the offshore income of its citizens;. Should we? That is the conclusion that Piketty came to.
This note was prepared for the launch The Pikety Phenomenon published by BWB books, a series of essays by New Zealanders (mainly economists) responding to Piketty’s thesis.