Harvard’s Feldstein: Piketty’s Tax-Hike Proposals Arise From Flawed Study of Income Data

May 16, 2014

Martin Feldstein, the Harvard professor who advised President Ronald Reagan, said best-selling French author Thomas Piketty is wrong to suggest that raising taxes will spread wealth and lead to fairer pay.

Piketty, whose “Capital in the Twenty-First Century” topped the New York Times bestseller list after being translated into English, argues that a global wealth tax is needed to halt growing income inequality that threatens democracy. He also favors a tax rate of 80 percent or more on high salaries.

Writing for The Wall Street Journal’s opinion page, Feldstein says Piketty doesn’t understand how wealth is created in a free market and how changes in tax rules have altered income data.

“His conclusion about ever-increasing inequality could be correct if people lived forever. But they don’t,” Feldstein writes. “Individuals save during their working years and spend most of their accumulated assets during retirement.”

The Harvard economist says that any money left over goes to estates taxes or is spread among children and grandchildren. He cites data going back to 1960 that show U.S. household wealth hasn’t grown faster than income.

Piketty also doesn’t consider changes in the tax code that “create a false impression of rising inequality,” Feldstein says. Reagan-era reforms led people to shift income to their personal tax returns and away from business filings.

“This corporate income of professionals and small businesses did not appear in the income-tax data that Mr. Piketty studied,” Feldstein writes.

Poverty is a bigger problem for this country than people who earn high incomes because of skill, training or luck, he says.

“To reduce persistent poverty,” Feldstein writes, “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.”

Meanwhile, Piketty recently told Yahoo that “when you have stagnant incomes, this puts pressure [on] for extra household debt, extra borrowing, and this contributes to make our financial system more fragile.”

Income inequality wouldn’t be such a big issue if our economic growth was stronger or if a wealth tax were imposed on the wealthiest 10 percent of Americans, Pikkety said.

But that’s a long shot, he said.

The growth in income inequality has hurt the economy because the wealthy spend a lower percentage of their income than the non-wealthy, says Jared Bernstein, a senior fellow with the Center on Budget and Policy Priorities.

This “has surely hurt consumption,” he told The Fiscal Times. “It hasn’t helped investment much either, despite the higher savings rates of those at the top of the scale, since investment capital’s largely been hanging out on the sidelines given weak demand.”