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Michael Potter Article Summary
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Summary of text M.J. Potter (20 November 2014), Capital in the Twenty-First Century: A Critique of Thomas Piketty's Political Economy, Agenda, 21(1).
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Thomas Piketty, Capital in the Twenty-First Century (Herein after referred to asCapital)
Basically this book deals with wealth inequality in Europe and US. Piketty
claims that inequality is rising in Europe and US and that the
governments should intervene and impose higher taxes for income,
wealth and inheritance for the rich.
Michael Potter, Capital in the Twenty-First Century: A Critique of Thomas
Piketty’s Political Economy
Outline:
It turns out that Pikettys analysis might be seriously fawed, due to the
data that he gathered, i.e he uses data that is not adequate for the task
and furthermore he interprets it dogmatically to ft his narrative.
Moreover, Pikettys solutions are questionable as well, as they include
measures that echo rampant marxism.
Potter critically analyzis the methodology and conclusions drawn by
Piketty in his book Capital. The paper examines 1. Piketty’s data; 2. his
explanation of the data; 3. the signifcance he attributes to this data; and
4. his remedy for the supposed problems.
A critical examination of the inequality data:
Pikettys analysis on wealth is largely based on data from tax returns, which is
not accurate, because It:
a) leaves out income support and government transfers;
Omitting this factor is misleading.
Example: When welfare income is included, the (disposable) income of the
bottom 90 per cent in the US rose nearly $12,000 between 1979 and 2012,
whereas Piketty’s data has this income dropping by $3,000.
Example: Piketty ignores public pensions in his calculations, but does include
private pensions. This is misleading.
b) incorrectly measures capital gains;
Piketty’s tax returr aata i clurae caiital gai s as i come i tee tear i heice assets are solah
A beter measurre of i come i cluraes caiital gai s hee teet accrure rateer tea hee teet
are realisedh
c) omits non-taxable income entirely;
, Piketty omits e.g public health care and other government provided benefts
in kind
d) is sensitive to changes in the defnitions of taxable income.
Pikettys use of tax returns as a measure of wealth has a fundamental
faw, which is the fact that tax returns may vary due to changes in laws
and not only due to the increase of wealth.
Different conclusions reached by others (copy pasted from the text):
. The share of disposable income after taxes and welfare payments going
to the top 1 per cent was around the same level in 1987/88, 1996, 2001
and 2009 (Kaplan and Rauh 2013).
. Globally, income inequality (measured by the Gini coefcient1) fell
slightly from 1988 to 2008, including when Piketty’s concerns about
correct measurement of top incomes are addressed. Thus, the apparent
increase in inequality is occurring within countries rather than across the
globe and could be seen as an artefact of where country boundaries are
drawn.
. Data from the Congressional Budget O ce show that from 1980 to 2010,
incomes for the poorest ffth of Americans rose by 44 per cent in real
terms before tax, or 53 per cent after tax (Samuelson 2014) – this is
signifcantly greater than the change in Piketty’s data.
. Household income inequality after tax (measured by the Gini coefcient)
did not increase from 1986 to 2010; this result is in a report otherwise
raising concerns with inequality (Lorenzetti 2014).
. The data from estate taxes show no increase in wealth inequality over
the past 30 years, similar to results from surveys by the US Federal
Reserve (Kopczuk and Schrager 2014).
. The latest data show there has been no increase in the share of wealth
owned by the rich, outside the top 0.1 per cent, since 1960 (Saez and
Zucman 2014: 3). Piketty himself indicates this data set is more up to
date and reliable than the data in Capital (Piketty 2014b). Even the
increase for the top 0.1 per cent has been called into question (Reynolds
2014).
For Australia:
• Incomes at the lowest end grew at a strong rate from 1988/89 to 2009/10
(Greenville, Pobke and Rogers 2013: 62).
1
A measurre of statstcal aisiersio i te aea to reirese t tee i come or healte aistriburto of a
ato 's resiae ts a a is tee most commo lt ursea measurre of i equralitth
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