This piece considers the implications of the writings of Thomas Piketty for the work of the Councils of Social Service in Australia, but it is also relevant to other organisations and individuals fighting inequality.

I have summarised Piketty’s major work in a separate article, and those who are unfamiliar with his work may want to read that first. Here I draw on my understandings of Piketty to challenge some familiar assumptions, data and policy prescriptions.

WHO AND WHY

Thomas Piketty became a “rock star” economist after the publication of his ground-breaking Capital in the Twenty-First Century in 2013/14. The book provided a macro-economic analysis of issues raised by the political mobilisations of the Occupy movements of the previous decade, and it helped put questions of inequality on the cultural and political agenda around the world.

The book contains new intellectual and data tools (resourced and built upon by a team of academics across a range of countries and presented in the World Inequality Database). It is also highly critical of the official data produced by agencies like the ABS and relied on by many of us. For this reason, it is a body of work we need to engaged with.

Piketty’s work was decried by right-wing think tanks (e.g. the Free Market Foundation, and the Cato Institute), but also threatened to be banned in China. And perhaps most famously, alongside an obsessive array of data, he used the nineteenth century novels of Jane Austen and Honore de Balzac as evidence of inequality.

What could be more inviting?

FOCUS ON WEALTH

Much of the public discussion of poverty, cost-of-living, concessions and income support (including my own work at SACOSS) focuses on inequality of income. However, Piketty’s work demands a new focus on wealth accumulation and inequality. His data highlights inequality of wealth, while the famous r>g formulation focuses on the role of capital/wealth in driving income inequality.

A recent study by Lisa Adkins and others builds on Piketty’s argument to argue that asset price inflation means that capital gains, capital income and inter-generational transfers are the preeminent drivers of inequality. This is important because those gains are mostly within the sphere of capital ownership. They may not show up as income at all.

It is well-known that inequality of wealth is generally greater than inequality of income, but the above suggests that a focus on income inequality may underestimate the true extent of economic inequality and miss key drivers of it.

Beyond mapping inequality, a focus on wealth is important because ABS data shows that there are significant differences in where particular households sit on wealth and income stratifications:

• Only 35% of households in the lowest income quintile are also in the lowest wealth quintile, 23% have average wealth (home-owning pensioners?) and 7.3% have high wealth;
• 42% of households in the highest income quintile are also high-wealth households – meaning that nearly 60% do not have high wealth.

Some recent SACOSS work has also shown significant differences between the expenditure patterns of households on essentials like water and public transport depending on whether their position is measured by income or wealth.

Insurance is another example of where expenditure is regressive in relation to income, that is, a proportionately bigger imposition on low-income households, but different when looking at households based on wealth. When considering income, making insurance cheaper (for instance by removing stamp duty on policies) looks like a good policy – and one that has been contemplated by SACOSS. However, such a policy will primarily result in a windfall for higher wealth households who have more to insure and proportionately higher insurance expenditures. For this reason, SACOSS has opted to call for an insurance concession for low-income households.

Similarly, policies that provide grants or subsidies to landlords for energy efficiency investments (as advocated in ACOSS’ NLEPP) are good in the income frame as they can lower energy bills for low-income tenants. However, such policies may also increase wealth inequality by increasing the value of the property and the wealth of the landowner.

In short, with an exclusive focus on income, we may be advocating and getting benefits for those who are financially well off, or we may not be targeting supports to where they are most needed.

DATA ISSUES

Even where the focus is on income, Piketty’s work raises questions about the data we use to categorise and measure income inequality. He argues that the household survey-data used in official measures of inequality is flawed both in collection method and categorisation. For instance, he suggests results vary if weekly, monthly or yearly income is used, while ratios between percentiles are volatile and surveys tend to significantly underestimate the income and wealth of the highest percentiles.

For this reason, Piketty prefers tax data and expresses inequality as a share of total income/wealth, rather than as the percentile ratios or Gini coefficients (found in ABS data). As per my previous post here, I also think the income share methodology is more versatile in that it can be applied to other areas such as gender. Indeed, the World Inequality database now includes this as part of its Australian data.

Piketty also suggests that the classification of households into quintiles is flawed. It suggests an even stratification of households and significantly fails to account for the massive increases in income and wealth in the top 10%, 1% or even 0.1% – and the power they exercise as a class. Instead he proposes a classification of classes defined as:

• Lower = bottom 50% of income or wealth
• Middle = from the 50^th to 90^th percentile of income of wealth
• Upper = top 10%, which includes the “dominant class” which are the top 1%.

He admits this is somewhat arbitrary, but the lower bracket accounts for very little of society’s income or wealth, and the definition of middle is close to common usage of people who are doing better than most, but not the elite.

ACOSS’ flagship inequality report uses similar categorisations for wealth, but not for income. Other work around the network of Councils of Social Service (e.g. SACOSS cost of living reports) also uses income quintiles which may hide the real distributional dynamics. This is often because of the limitations of the data published by the ABS, but where there is the opportunity to use microdata to produce our own statistics, we should not be bound by ABS categories.

POLICY

The final chapter of Piketty’s second great tome, Capital and Ideology, outlines policy proposals which arise from his analysis. All reflect a base understanding that inequality should be limited and that to do this, we need to think about wealth as temporary and social, not a permanent and inalienable individual right. He proposes a number of large-scale policies or directions to limit inequality, including:

• Co-management and power-sharing within corporations
• Progressive income taxes and a basic income provision
• Progressive annual wealth tax
• Progressive inheritance taxes
• Universal capital endowments of $100k or more paid to 25-ish year olds (and taxed back over time)
• A public register of assets to facilitate greater transparency of wealth
• A constitutional principle of fiscal justice based on non-regressivity and the publication of information on how tax is apportioned among the population
• A progressive carbon tax
• A just distribution of educational investment
• Replacing tax deductions for political and charitable giving with funding vouchers for people to allocate to their preferred charities.
• Transnational democracy and new global institutions.

The tax policies are obviously difficult to achieve politically, but go well beyond the timid tax changes the Councils of Social Service often champion. Apart from some mischievous SACOSS mentions of inheritance taxes, changes to negative gearing and capital gains tax are about as bold as we get (see for instance, ACOSS Budget Priorities, Section 10). These proposals are certainly steps in the right direction – but they are a long way short of annual wealth taxes. However, the power of Piketty’s historical and comparative analysis is that none of the big tax policies are utopian dreams. They all have existed at different times and/or currently exist in different places.

The universal capital endowment is more speculative. While I can see how it flows from the analysis, I worry about the implications for those who through fate/sickness/whatever don’t make the most of that endowment. Having had their perceived chance, will they simply be left behind with no support/sympathy?

Similarly, while in a previous post I have recommended removing tax deductions for charitable donations, I fear the alternative Piketty proposes. He proposes a voucher scheme where everyone can vote an allocation of money. But based on some local examples of where South Australians were asked to vote funding for neighbourhood projects, it is easy to see that such a scheme may simply lead to a populist contest where money does not go to where it is most needed.

THE ULTIMATE QUESTION

However, the quibbles above are relatively trivial issues for what are big proposals for broad policy directions. And beyond the individual proposals, Piketty’s work prompts one big final question: in the face of the macro-processes that are driving inequality, is the scale of change we often work at really going to make a dent on rising inequality?

I suspect not, but that is the ultimate challenge of Piketty’s work. It is a theme I will return to in future posts.