Either way, putting Thomas Picketty’s bestselling book: Capital in the 21st Century on your coffee table makes a lot of sense.
Picketty (pronounced pique-et-tee with a thick Parisian accent if you want to really piss off all of your friends and be called a know-it-all) has done what most thought impossible. No, I don’t mean that he has mostly explained the ultra-complex nature of wealth inequality and put forth some logical (if unlikely) fixes to the situation – although he did that as well.
Instead, pique-et-tee (don’t you hate me just a little more now?) managed to make a book about economics a bestseller. That’s pretty damn difficult. The Ph.D. from the Paris School of Economics also managed to write a 700+ page book that people are actually talking about (even if they don’t read most of it). For anyone not named Rowling or Martin that is rarely seen. Finally, a French dude managed to sell a lot books in the USA – which is probably a sign of the apocalypse. When one takes all of those points into consideration, it’s pretty tough to ignore that there must be something to this whole inequality thing.
R>G = ?????
Full disclosure, I did not climb the entire mountain read the entire book. I did get through about 500 pages of the monster before succumbing to the temptation to read this executive summary instead (an excellent bang for your buck and reading time) and then read some of the more popular reviews about the book. Despite the fact that some ultra-conservative commentators have picked at the edges of some of the data Picketty used, it should be noted that Picketty has responded to all specific criticisms and there is absolutely nothing out there that factually refutes the statistics put forth in the book, regardless of what you heard someone with a bachelor of arts degree say on talk radio.
Capital does make reference to income inequality and pays attention to the rise of certain salaries at the top end of the scale relative to the rest of us “middle-classers”; however, this isn’t the focus of Picketty’s thrust.
His main goal is to explain that overall wealth inequality (essentially your net worth as opposed to what your paycheque looks like) is rapidly surging around the world and that it will likely only get worse. He sums up his argument with the simple formula of r>g. Now I should admit that while I’m a bit of a finance geek that likes to read, I’m by no means qualified to explain the premises Picketty puts forth. But I feel safe in saying that r>g can basically be boiled down to the idea that going forward (and for most of human history) overall growth in the economy is not split evenly between the people that provide the labour and the people that provide the financial capital. To simplify it even more, the people that own stuff – land, factories, stocks, patents – will see their bank accounts grow much quicker and at a much faster overall rate than the people that work for a pay cheque and then use that money to live life.
Not All Income Is Created Equal
Regardless of where you stand on income inequality, overall inequality is a bit of a different ball game. The rationale for people earning a lot of money makes some sense. Elite performers in their fields such as Warren Buffett, Jay-Z, Lebron James, Oprah, or Ed Clark (CEO of TD Bank – one of Canada’s leading financial minds) deserve to be paid. There is a debate to be had about how much more than the average person they should make, but at least they achieved their wealth through hard work and overall talent.
Capital points out though, that the really destructive development, is when people can live off of inherited wealth forever. When being a part of the investor class, with access to trusts, tax havens, special accountants, lobbying powers, and special tax loopholes, means that your descendants get to live off of other people’s talents and work forever, that becomes an issue. In many ways this isn’t about the “1%” that you see on the news. This is about the .1% or even .01%. The five people I outlined above who make a lot of money came from relatively modest means and rose to the top of their professions – they epitomize the idea of social movement and the principle that everyone has a fair shot at making it to the top. Alternatively, roughly 1/3 of the Forbes 500 is now inherited wealth and that number will only grow with time if Picketty’s thoroughly-researched premises hold true.
Related: Passive Income: How to Get It
Doomed To Repeat History If We Don’t Understand It…
Some other cool stuff in Capital (cool being relative to the fact you are a history and/or finance geek) is how we got to the current place we are at now. The idea that a middle-class is natural and is something to be expected is without a doubt shattered by Picketty. The economic rockstar points out some really interesting developments that occurred as a result of WWI and WWII. Due to all the government borrowing and the really high marginal tax rates that came about as a result (over 90% in the USA for a brief period!) there were a few decades where wealth was destroyed and/or transferred to a middle-class from the few at the top of the food chain. Before that, the world was an incredibly unequal place – to the tune of the infamous 1% owning like half of a country’s assets!
Anyway, the gist of learning a little about the history of income and wealth inequality is that one can begin to understand the last 30 years or so and why it really shouldn’t surprise us that things are getting more unequal around the world every day. Because our lives are relatively short through a historian’s eyes, we think of this current period of stagnating wages and growing inequality as a drastic change that is unnatural, when in fact it is really the period we just came out of that is the real outlier or change from the norm. History’s momentum will inevitably take us back to the early 1900s (and pretty much any other time in recorded history) unless something fairly radical happens to change course (it took two World Wars the first time, just to give you an idea).
Doesn’t this Frenchman Want to Take All of My Money?
Picketty’s proposed solution is a bit extreme at first glance and even he admits it is completely unrealistic given the current political climate around the world. The idea is not to tax income necessarily (although that might help as well), but instead focus on overall wealth or assets. A yearly tax on your net worth is basically what Picketty recommends. So yes, that could mean a tax on the value of your house – BUT – the tax would only be .1% if your net worth was less than about $270,000 USD (or 200K Euros). On a $200,000 net worth that adds up to $200. Sure, that’s not a treat to pay, but I don’t think too many people would worry about that $200 when compared to the insanity of the tax system we currently navigate. On wealth above $6,750,000 USD or so ($5 million Euros) Picketty proposes we take 2% yearly, with a few echelons in between.
Of course in today’s international world if any country tried to do this we’d quickly see an exodus of the rich (taking their much-needed capital with them). Consequently, the only way this whole thing works is if the vast majority of the world, including all of the 1st world countries, do it at the same time. Good luck with that.
Related: How to Get More Money Back from your Tax Return
How Much of a Leg Up Does One Need?
One thing this debate did do for me is reverse my thinking on the idea of an inheritance tax. Now I know most rich folks will just beat the inheritance tax through loopholes anyway, and I know that for many that money has already been taxed once. However, if we were to put in a rule where an inheritor were able to inherit $2 million or so before any inheritance tax were paid (so in this hypothetical example, if a couple had 3 children, they could leave $6 million worth of assets behind tax-free) and then use the proceeds from that tax to directly pay down our debt at various levels of government or to repair the damage done to the CPP (no need for committees, large ridiculous government bureaucracies, or waste of any kind) then I think most Canadians would support the idea. One should get wealthy from hard work and risk-taking, for providing something of value to society, not from winning the birth lottery. If you need more than a $2 million head start (you could still get more than that, you would just have to pay a little tax on every dollar from there) in life you’re doing something wrong anyway. It’s interesting to note that they already have a version of this in the USA. How is Canada the hippy in this relationship again? 😉
Tune In Next Time…
Originally I had intended to get to some more practical advice concerning the new world that we live in as well, but seeing as how I got a little too in touch with my inner Picketty and rambled on for way too long already, maybe it’s best to pause things here and come back in a couple days with the follow up.
If you want to hear other people’s thoughts on this discussion check out the online clip or podcast from our most recent edition of the Money Mastermind Show!