At Forbes, Tim Worstall explains why — despite the headlines — Piketty didn’t actually change economics:
That optimal taxation theory really rests on two things that we’re pretty sure are true. The first being that Laffer Curve thing. No, this doesn’t mean that all tax cuts pay for themselves. Rather, that it’s possible for tax rates to be so high that they actually reduce the amount of tax revenue being collected. A nice example of this is the latest rise in New York’s cigarette tax: less money in total is now being raised even though the tax rate has risen. Given that our primary purpose in taxing is to get the money we need to run the government that we must have (as ever, my opinion being that we might want to have less government, and thus lower taxes, than we currently do but that’s another matter) having a tax over the revenue maximising rate just isn’t sensible.
The second pillar is that we know that different taxes destroy different amounts of economic activity for the same revenue collected. As above, we want to gain revenue but obviously we also want it at the least cost. That means getting as much of it as we can from the low deadweight costs taxes and as little of it as we can manage from the high cost ones. We also know how the spectrum looks. At the lowest deadweight costs we have repeated taxes on real property (say, a land value tax), then taxes upon consumption (VAT or sales taxes) then on incomes and highest of all, upon corporates and capital. There’s one off the spectrum, transactions taxes like the financial transactions tax, but that’s so silly that no one serious is suggesting it.
So, standard and general theory insists that we shouldn’t be taxing corporates and capital at all if we can manage it and also that we don’t want to have very high taxes rates on anything.
So, if for political (or even emotional) reasons you think that we really should be gouging the rich then you’re going to have to go find yourself some new economic theories. And that, I think, is really what is going on here with Piketty and the gang (slightly catchy that, isn’t it? The Piketty Gang ride in, a hollerin’ an’ a whoopin’ and take all the money from Scrooge McDuck?). They want to find a reason to tax wealth, something conventionally contraindicated, and they want to have very high income tax rates, something also contraindicated by conventional theory. So, rather than try to overturn that conventional theory they’re bypassing it. Ignoring it even and just bringing up the idea of inequality instead to see if that will convince people.
