Piketty Can’t Even Get His Basic Tax History Right
Robert P.Murphy
Blog Free Advice
Capital & Interest
The more I read of Thomas Piketty’s Capital in the Twenty-First Century, the worse it gets. Try this excerpt:
The more I read of Thomas Piketty’s Capital in the Twenty-First Century, the worse it gets. Try this excerpt:
[T]he Great Depression of the 1930s struck the United States with extreme force, and many people blamed the economic and financial elites for having enriched themselves while leading the country to ruin. (Bear in mind that the share of top incomes in US national income peaked in the late 1920s, largely due to enormous capital gains on stocks.) Roosevelt came to power in 1933, when the crisis was already three years old and one-quarter of the country was unemployed. He immediately decided on a sharp increase in the top income tax rate, which had been decreased to 25 percent in the late 1920s and again under Hoover’s disastrous presidency. The top rate rose to 63 percent in 1933 and then to 79 percent in 1937, surpassing the previous record of 1919. [Piketty pp. 506-507]
Look, I don’t mean to be a stickler, but the above tax “history” is totally wrong. Here is the actual history of the top federal income tax rate, from the Tax Policy Center:
The column you want to look at is second from the right. A few things:
(1) The top rate was lowered to 25 percent in 1925, not exactly “the late 1920s” and certainly not by Herbert Hoover. (I think the brief 24 percent rate in 1929 was a one-off adjustment in the surtax, but I am not certain and I’m not going to go look it up right now.)
(2) The top rate was jacked up to 63 percent in 1932, not 1933, and it was done by Herbert Hoover, not by FDR. (Note that the 63 percent rate applied to the 1932 tax year, so we can’t rescue Piketty by saying he was referring to the first year of impact rather than the passage.)
(3) The top rate was raised to 79 percent in 1936, not 1937. (If you want to cross-reference another source, this page also agrees that the 79 percent rate kicked in in 1936.)
Now if there had just been one instance of Piketty being off by a single year, I would excuse it by saying maybe he got mixed up in interpreting how US tax laws work. But to say (or did he merely imply?) that Hoover was the one to lower tax rates to 25% is just crazy; Hoover wasn’t inaugurated until March 1929, and the top rate was lowered to 25% back in 1925.
Furthermore, notice that this isn’t an “arbitrary” screwup on Piketty’s part: On the contrary, it serves his narrative. It would be really great for Piketty’s story if the right-wing business-friendly Herbert Hoover slashed tax rates to boost the income of the 1%, thereby bringing in a stock bubble/crash and the Great Depression. Then FDR comes in to save the day by jacking up tax rates. Except, like I said, that’s not what actually happened.
So let’s see: The #1 Amazon bestseller is a work involving a theoretical mechanism that explains how interest rates will interact with GDP growth in order to yield an ever-rising share of capital income, and this is embedded in what is (we are told) a masterful historical analysis of tax policy and income distribution. So far we’ve seen:
(a) Piketty’s theoretical structure suffers from basic confusion, which was so bad that Nick Rowe declared in the comments here: “If an economist writes a whole book about capital and the functional distribution of income, you would think he would at least understand the very basics of the theory of capital and interest. He does not.
Bob is absolutely [right] about this. How come anyone takes this stuff seriously?”
Bob is absolutely [right] about this. How come anyone takes this stuff seriously?”
(b) Piketty truly doesn’t know the first thing about the Cambridge Capital Controversy.
and
(c) Piketty botches basic historical tax facts, in a way that helps his narrative.
But hey, it’s all good. He gives us a scientific justification for taking property away from rich people. Why let the above quibbles get in the way of worldwide confiscation?
I wonder if mainstream in this case is base on Ramsey model?I learnt in college that base on Ramsey model capital tax is the worse type of tax, is he dealing with this issue anyhow?
industries was 62 cents an hour. In January, 1968, it was
$2.64 an hour. But our legislators, not content with this
general rise in wages due to more and better tools and
natural economic forces, have decided to keep raising
the legal minimum wage even faster than the fast-rising
market average. Thus the statutory minimum was only
29 per cent of average hourly earnings in manufacturing
just before the increase in 1950, but 40 per cent
before the increase of the minimum in 1956,43 per cent
before the increase in 1961, 47 per cent before the increase
in 1963, and 54 per cent before the increase in
1968. The consequence of this is that the legal minimum
wage was pushed up 114 per cent between early 1956
and 1968, though average hourly earnings in manufacturing
rose only 55 per cent. Meanwhile, the Federal
minimum wage has become effective over a far greater
range.
The net result of all this has been to force up the wage
rates of unskilled labor much more than those of skilled
labor. A result of this, in turn, has been that though an
increasing shortage has developed in skilled labor, the
proportion of unemployed among the unskilled, among
teen-agers, females and non-whites has been growing.
The outstanding victim has been the Negro, and particularly
the Negro teen-ager. In 1952, the unemployment
rate among white teen-agers and non-white
teen-agers was the same—9 per cent. But year by year,
as the minimum wage has been jacked higher and
higher, a disparity has grown and increased. In Februaryary of 1968, the unemployment rate among white teenagers
was 11.6 per cent, but among non-white teenagers
it had soared to 26.6 per cent.”