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Thomas Piketty doesn’t hate capitalism

He just wants to fix it


Thomas Piketty is not the anti-capitalist radical that his critics fear.

"The market economy," he tells me at the bar of the St Regis Hotel in downtown Washington, DC, "is a system that has a lot of merit." (The location was chosen by the publicist for the English edition of his book; she admitted to me that perhaps it was a little too "top one percent," but it fit everyone's schedule nicely.)

Piketty is very French, with several buttons on his shirt undone, a fairly thick accent, and a Bourdieu reference ready to drop in response to a question about whether economists overemphasize mathematical models over empirical analysis. His book, Capital in the 21st Century (see our short guide), is being widely hailed as the most important economics volume of the decade and this week became the top-selling book on Amazon. It provides intellectual heft for some of the activist energy around Occupy Wall Street and other efforts to advance a post-Obama left-wing politics. Its core thesis is that capitalism, if left untamed, suffers from a fundamental flaw and will inevitably lead to a growing concentration of economic power into the hands of those lucky enough to inherit large sums of wealth from their parents, a state Piketty calls "patrimonial capitalism."

"My point is not to increase taxation of wealth. It's actually to reduce taxation of wealth for most people"

Thomas Piketty

National Review and The Nation rarely agree on much, but both the right-wing and the left-wing magazines have reviewed Piketty as part of a revival of Marxist thinking.

It's probably no coincidence that Americans see Piketty — a professor at École des hautes études en sciences sociales — as more left-wing than he sees himself. The French political debate is considerably broader than the American one (I recall a dinner a few years back at which a senior member of what's considered the moderate wing of France's currently-in-power Socialist Party told the room that the problem with American Democrats is they don't see the need to "transcend capitalism entirely.") So the view that capitalism should be tempered by a top tax rate of 80 percent on wage income supplemented by a modest tax on net wealth is not necessarily a radical viewpoint there. During our conversation he expressed admiration for the "responsible" attitude of German labor unions toward the needs of the firms they work for, presumably in contrast to the counterproductively militant attitudes of French labor.

Indeed, he is at pains to stress that he's not even really a madcap tax raiser or an enemy of wealth accumulation. "My point," he says, "is not to increase taxation of wealth. It's actually to reduce taxation of wealth for most people."

America's secret middle-class wealth tax

Piketty's big point about the United States is that we actually do engage in substantial wealth taxation in this country. We call it property taxes, and they're primarily paid to state and local governments. Total receipts amount to about 3 percent of national income. The burden of the tax falls largely on middle-class families, for whom a home is likely to be far and away the most valuable asset that they own. Rich people, of course, own expensive houses (sometimes two or three of them) but also accumulate considerable wealth in the stock market and elsewhere where, unlike homeowners' equity, it can evade taxation.

The goal should be to make the haves pay more so that the rest of us can pay less

Piketty also observes that the current property tax system is curiously innocent of the significance of debt. A homeowner is taxed on the face-value of his house, whether he owns it outright or owes more to the bank than the house is worth.

"If you own a house worth $500,000 but you have a mortgage of $490,000 then your net wealth is $10,000," he explains. "So in my system you would owe no tax."

Right now, an upper-middle-class person with a pricey house and a mortgage is taxed identically to a colleague with a similar income who inherited a similar house from his parents. This, to Piketty, is nonsensical. He thinks economists who emphasize the importance of building a tax code that's friendly to wealth accumulation are onto something, but that the emphasis on low rates for the rich is entirely misguided. The goal should be to make the haves pay more so that the rest of us can pay less.

The art of the impossible

Historically speaking, real estate has been taxed more heavily than other kinds of wealth because you can't hide a house or shift it to an offshore account in the Cayman Islands. In contrast, state and local governments lack the technical capacity to tax mobile wealth like stock portfolios. Piketty acknowledges this, and thinks wealth taxation should be undertaken by national governments (or the European Union) acting in a globally coordinated manner to prevent funny business and crack down on tax havens. This would be hard to pull off, of course, and combining it with an intervention into local government finances to cut the property tax would be harder still.

A century ago, he says, the progressive income tax would have been regarded as an impossible pipe dream

Piketty is unimpressed by arguments about political futility. A century ago, he says, the progressive income tax would have been regarded as an impossible pipe dream. And yet it happened. Not just in a Europe terrified by the Bolshevik Revolution, but in the United States as well.

"The Constitution of the US made it, in principle, impossible to have an income tax," he observes, "and yet it happened." The role of scholars, he thinks, should not be to prognosticate on the political viability of various proposals but simply to try to assess their merits.

The undercounted heirs and heiresses of America

When I try to engage Picketty on the role of entrepreneurship in the generation of wealth, however, he returns to his real passion, which is not public policy but data. Not so much in the currently fashionable sense of complicated number-crunching, but in the old-timey practice of painstaking empirical work. The main point of his book is to debunk a well-known economic principle known as the Kuznets Curve, which holds that capitalist economies will show a reduction in inequality over time. He is a great admirer, however, of the curve's creator, one of the giants of economic data collection. Simon Kuznets's influential life's work in the mid-20th century was to create national income statistics — GDP and the like — first for the United States and then for a variety of other countries. Economics students take these numbers for granted today, but they had to be scrupulously assembled in the relatively recent past.

We are almost certainly overcounting entrepreneurs among today's super-rich and undercounting the descendents and past entrepreneurs

"It's very strange," he says, that Kuznets's work on national income accounting "was not really pushed forward" after the 1950s. The next two generations of researchers was largely uninterested in trying to create national accounts further back in time to better understand the past and the long-term trajectory of capitalism. "It's too historical for economists and perhaps too economic for historians."

Piketty's interesting point on entrepreneurial wealth turns out to be that the famous Forbes 400 list of the richest people in America (and similar lists in other media outlets) is probably mistaken
. Not just mistaken, in fact, but systematically biased to overrepresent entrepreneurs and underrepresent heirs and heiresses. This isn't a matter of ideology (though Piketty does think the publications in question are ideologically biased toward valorization of entrepreneurs) but of the limits of data. After all, the task of estimating the net worth of a major entrepreneur is relatively straightforward. Mark Zuckerberg is rich because as the founder of Facebook, he owns a lot of shares of Facebook stock.

Mark Zuckerberg. Photo by Guillaume Paumier, CC-BY

To calculate his wealth you start with the number of Facebook shares he owns (a matter of public record thanks to the paperwork companies have to file with the Securities and Exchange Commission regarding their major shareholders) and then you add in the price of a share of Facebook. Multiply the two together and you have an excellent approximation of Zuckerberg's net worth.

But consider Zuckerberg's hypothetical future grandchildren. These grandchildren will, presumably, inherit a lot of money. But it's also reasonably likely that they won't play a management role in Facebook. And the prudent thing for them (or the creators of their trust funds) to do would be to hold a diversified portfolio of wealth rather than a large block of Facebook shares. They would be broadly invested in domestic and foreign stock markets, probably own a bunch of real estate, and maybe include some alternative investments (a hedge fund here, a commodity index there).

Tracking it all down would be possible, though perhaps difficult, in the course of a contentious lawsuit in which someone has the power to issue subpoenas. But a merely curious journalist has no real way of finding out how the holder of a diverse portfolio of inherited financial assets is doing.

In other words, we are almost certainly overcounting entrepreneurs among today's super-rich and undercounting the descendents and past entrepreneurs. And a generation or two from now we are very likely to underestimate the wealth of the descendants of today's entrepreneurial billionaires.

"One of the main purposes of the wealth tax is that it should produce more information on wealth"

Piketty's eyes light up when he explains that "one of the main purposes of the wealth tax is that it should produce more information on wealth."

His key early contribution as an economist was to show that earlier studies of income inequality based on Census Bureau survey data were seriously misleading and that it's possible to use IRS income tax data to get a much clearer view. The survey data only lets you look at relatively broad swaths of the population — the top 10 percent or the top 20 percent — and thus ended up entirely discounting the possibility that the top 1 or 0.1 or 0.01 percent would look very different. Since taxes are paid by individuals rather than representative samples, tax data lets you see what the extremely rich are up to. For the United States, that IRS data goes back to the origins of the income tax in the early 20th century but not further.

The "primary purpose of the tax system is to generate administrative data on inequality"

In the book he waxes enthusiastic about the extensive wealth assessments done for tax purposes by the governments put in power by the French Revolution and the excellent historical data series this collects.

A senior official in the Obama administration joked to me that Piketty appears to believe that the "primary purpose of the tax system is to generate administrative data on inequality" rather than to raise revenue.

That's not quite right, though Piketty does seem to attribute an almost magical power to empirical information when he tells me it's "the lack of financial transparency" — rather than interest group politics, sincere normative disagreement, or human tribal instincts — that "makes it very difficult to have a quiet political conversation and democratic debate about these things."

Data utopianism aside, it is true that not only is Piketty perhaps not so left-wing for a Frenchman but a bit less in line with mainstream Democratic Party politics than it at first appears. Tax increases — especially on the rich — are a genuine passion of the Obama administration and its allies in Congress, as well as of many leading Democrats in state and local government. But the point of all this taxing is very much to obtain revenue. Revenue, you see, allows for the government to pay for public services. Whether that's shoring up the fiscal sustainability of Medicare and Medicaid at the federal level or creating a vast new Pre-K system in Bill de Blasio's New York, the key priority is to get the money in order to spend the money.

Tax hikes on the rich aimed at financing tax cuts for the middle class instead of public services would be a different kind of politics. But Piketty, despite his stated lack of interest in pragmatic politics, thinks it's a more powerful message. It's easy for the wealthy to disparage a tax-raising agenda as simply meaning higher taxes and wasteful spending with no benefits for the rest of the population.

"I think it's a big trick," says Piketty, "and it's possible to do away with it."

Matthew Yglesias: In your book there's a very amusing criticism of American economists and what you call their childish mathematical obsessions. What’s being done wrong?

Thomas Piketty: It's not only in US. It's economists everywhere. I think what they're doing wrong is that in order to distinguish themselves from other disciplines, in order to look like we all are scientists, they use too much complicated math just for the sake of it.

Math is fine. Math is very cool. But very often, they tend to push for more sophisticated math just to push off other people. It's an easy way to have the appearance of scientificity. For a real mathematician or physicist, the math will not be terribly impressive but it's enough to impress those economics departments that are less good at math and those social scientists who are less good at math.

I think math is useful, if you have a good ratio of facts to theory. But most of the time the economists do the opposite. There are incredibly sophisticated mathematical models with a very tiny empirical component.

For the most part it's like [Pierre] Bourdieu, "La Distinction," with art taste. It's a way to distinguish your self from the commoners and to look more sophisticated.

Matthew Yglesias: One of the main points of your book is to engage more with history.

Thomas Piketty: To me, the frontiers between the different social sciences are not clear at all and are a bit of an artifact. I think economics should be like other social sciences. We should be quite pragmatic about our methodology.

When you need to archival work or when you need to construct a statistical series, do it. Or do it when you need a little bit of an economic model. We should be a lot more pragmatic.

In the field in which I'm working, it's very strange that the work of [Simon] Kuznets that was done in the '50s was not really pushed further. Part of the reason is because it's too historical for economists and maybe also too economic for historians.

It's not only economists’ fault. Historians and sociologists are too often are leaving the study of economic issues to economists. Sometimes nobody does it.

Matthew Yglesias: Why did you get interested in switching from looking at income to looking at wealth?

Thomas Piketty: In a way, wealth is a deeper issue because wealth is the accumulation of past income. But it's more than that. You also have inheritance. You also have natural resources, which can be part of wealth that was not saved by anyone or not wealth of the previous generation.

It's an object that encompasses income, but that is broader and also that is in a way a better indicator of total inequality, lifetime inequality. It's more permanent than income.

From the beginning in my work in income, I was very interested in the balance between capital income and labor income. If you really want to study this issue, and capital income declined in the first half of the 20th century, you need to get at capital directly. Because you don’t have income data for the 19th century but you do have wealth data. That’s also the only way to study the 19th century and to put the 20th century short into a longer perspective.

Matthew Yglesias: For a long time, people have looked almost the post‑1980 economy as exceptional. I think your view is that we should see the mid 20th century as the exception. Is that right?

Thomas Piketty: Yes, to some extent. I think one of the lessons of putting this evolution to a longer perspective is that there are some similarities between 1900‑1910 and today, so between the first globalization from 1860‑'70 to 1914, and the second globalization that has started in 1970s‑'80s.

I think it's very fruitful to put these two periods into parallel, and to realize that in between was certainly a set of very particular circumstances, with two World Wars, the Great Depression, and a very particular set of institutions and policies that were put in place following these upheavals.

There was also an exceptionally high growth rate. That was partly due to the recovery from the war, but also partly due to the demographic transition. There was a Baby Boom in the mid 20th century that was unusually large. That probably won’t happen again. Nobody is sure, of course, but that seems to be behind us.

Matthew Yglesias: I'm sure you're aware of the traditional neoclassical idea that taxing capital is very damaging to the prosperity of society. Why are you not impressed with that result?

Thomas Piketty: I have done work in optimal taxation, so I know this story quite well. In order to get a zero capital tax result, you need basically two very strong assumptions. One is that wealth is entirely a life-cycle wealth; you have no inheritance at all. Once you have inheritance, you want to tax it.

Point number two is, whenever you have a capital market imperfection, or whenever you have some imperfect observability of income from really top wealth holders, you find that the very notion of consumption is not very well defined.

What's the consumption or income of Warren Buffett or Bill Gates when they are using their corporate jet? Are they consuming? Are they investing? Nobody knows. Wealth is a much better indicator of the ability to pay tax for people who really have a lot of wealth, whereas income is typically not so well‑defined.

Capital market imperfection is another reason why we want to have capital tax.

Now, the zero capital tax result which Robert Lucas once called the greatest result in economics. He has this expression in his Nobel lecture where he said, "This is the most genuinely a free lunch I have ever earned, working in economics." So he seemed really to believe in it.

In fact, it relies on very strong assumptions that make the result almost abuse. Once you deviate from these assumptions, capital taxation is useful.

Matthew Yglesias: There's still, I think, an intuition that if a society has more wealth, that that's good.

Thomas Piketty: Of course, but my point is not at all to destroy wealth. My point is to increase wealth mobility and to increase access to wealth. The fact that we have a very high wealth‑to‑income ratio is good news.

In fact, my book has a lot of good news. I don’t endorse apocalyptic readings of my book. We always talk about public debt. My message is, "Well, look, we have public debt, but we have a lot of wealth."

When I talk about the progressive wealth tax, I'm not thinking of increasing the total tax burden. Think of the US right now where you have the property tax, which is a lot of money. That's a very big tax.

Now what I would propose is to transform it into a progressive tax on net wealth. That means that I would reduce the property tax for all those who have low net worth, and increase it on those who have billions. The way it would work is,that if you own a house worth $500,000, but you have a mortgage of $490,000, then your net wealth is $10,000 so in my system you would owe no tax. Under the current system, you pay as much property tax as someone who inherited his $500,000 home or who paid off his debt a long time ago.

My point is not to increase taxation of wealth. It's actually to reduce taxation of wealth for most people, but to increase it for those who already have a lot of wealth.

Matthew Yglesias: What did you think of Paul Krugman’s criticisms in The New York Review of Books that you didn’t adequately discuss the role of financial deregulation?

Thomas Piketty: I agree with him that financial deregulation is an important part of the rise of top managerial income in the US, but that’s only part of a broader picture.

From what we know finance is about 10 percent of GDP, and it's about 20 percent of the top 0.1 percent’s income, which is a lot. That's twice as much as the share of GDP, but that still leaves 80 percent of the 31,000 outside finance. So finance is important, but I think the rise of top managerial income in the US is broader than just the finance issue.

I think Paul agrees that the rise of top managerial compensation in the US, in finance and outside finance, was certainly stimulated by the huge cut in top marginal tax rates so I'm not sure we really disagree on that.

Matthew Yglesias: How do we know that high executive compensation comes out of the pockets of other wage earners?

Thomas Piketty: Well, because the labor share including CEO compensation did not increase. It actually declined. Maybe it would have declined even more without the rise in CEO compensation, but that's hard to believe. I think the rise of very large CEO compensation came at the expense of the workers.

If the performance of the US economy during that period had been excellent, of course I would see it differently. I’d be okay with a huge increase in the top one percent’s income if it was the price to pay for a 5 percent growth rate, but the performance of US corporations and the US economy has not been particularly good over the last 30 years. Instead, the performance of the US economy was actually better before 1980 than since 1980. If you compare the companies that are paying their CEO $10 million with those that are paying $1 million, it's not clear that you get an extra performance out of that.

Matthew Yglesias: I thought one of the most interesting graphics in the book is the one where you show the price-to-book ratio in Germany is quite a bit lower than in the other countries. Is there an important lesson the rest of the world can learn there?

Thomas Piketty: Yeah. Actually, to me this was quite striking. Previously I didn't take seriously this idea that there were different ways of organizing capitalism and the property of capitalistic firms.

I think the lesson from this graph is that the market value of a corporation and its social value can be two different things. Of course you don't want the market value to be zero, but the example of the German corporation shows that even though their market value is not huge, in the end they produce some of the best cars in the world. They export a lot, and they are very successful. I think getting workers involved on the board of German corporations maybe reduces the market value for shareholders, but in the end, it forces workers and unions to be a lot more responsible for the future of the company.

Matthew Yglesias: Do you think there's some merit to trying to slice a little finer than a broad wealth tax?

Thomas Piketty: The history of capital that I'm trying to tell you is this book is certainly multidimensional. The story of real estate is not the story of business capital, and it's not the story of land capital, and it's not the story of slave capital, and it's not the story of financial capital, or the story of public debt.

Capital is multidimensional, and each single asset has its own valuation problem. It's always difficult to put a price on capital. It's always difficult to put a price on everything. You always have social conflict, compromise, imperfect competition, bargaining power, explaining how differently positive different assets.

When I do sum all these assets and their market value, I do not mean to suggest that this is an adequate summary of everything. I am very much aware that this operation of summing up everything as a single market value of all capital assets and call it K, and this is capital, it's an incredibly abstract operation.

I think it can be useful for some purpose, as long as we have a critical eye and keep a critical eye on what it means. One should not put too much weight on this abstract operation, and on how much I believe in it.

I certainly do not believe in a model with a single form of capital. The one good model where we produce apples and capital is just a physical accumulation of apples is not an adequate model to describe any society at any period in time.

Matthew Yglesias: When you have a proposal for a tax on net wealth, that doesn't really try to draw distinctions between different things that exist. I think it strikes some people as perhaps excessively blunt. You could tax land value. You could reform the patent system, or attempt a system like they have in Germany, where workers have more of a say in how the enterprise is run and so shares of stock are less valuable.

Thomas Piketty: These are all complementary solutions. I don't know why people are looking for the magic bullet that will kill all birds with one stone.

Patent regulation and patent code is a very important topic. Now, is that going to replace progressive taxation? Probably not. I don't see the point of trying to impose these different solutions. I think they are all complementary.

Now, when you come to taxation, the case for taxing the net market value of assets is: historical experience suggests that if you try to have some non‑market price then you get into troubles very quickly because different places, different localities, will be adopting different prices. In the end it’s going to become a big mess.

We know the market prices are not perfect, but they are there, they exist, they are sort of observable, and if you want to tax people this probably is the best solution.

Matthew Yglesias: Historically, rather than this kind of wealth tax, we had a lot of inflation. Do you see a role for that?

Thomas Piketty: Inflation has proved to be very useful to reduce the large stocks of public debts that we had in the 20th century. Now the progressive wealth tax, in a way, is the same thing as inflation, but this is sort of a civilized form of inflation.

It’s like inflation, but you can make sure that people with limited wealth would not be hurt, and people with billions would pay more. With inflation you have chaos, in that you don't actually know who's going to pay for it.

Very often, not only do you destroy the public debt, but you also destroy the savings accounts of lower and middle class people. I think this is why Europe today, for instance, has a very hard time with inflation.

That's why I think tax on private wealth or property tax on private wealth is a better way to go than inflation. Now, if we don't have the tax, inflation is better than austerity. If you only have budget surpluses to reduce a public debt of 100 percent GDP with zero inflation, which is what we have in the Euro zone right now, it can take decades and decades.

Matthew Yglesias: One area where there's a conflict between many of the common models and what you say you find is this idea that the rate of return on capital can exceed the growth rate, going forward for many decades. It seems like if growth slows down, at some point doesn't the rate of return have to fall below it?

Thomas Piketty: No. There's no model that says that. The way it works is that people who have wealth consume some of the return from their wealth.

Assume the rate of return is 5 percent and the growth rate is 1 percent. What's going to happen is that on average the wealth holders will reinvest one fifth of that and consume the other 80 percent. Then there is no problem. The only theoretical model where the rate of return should go to the growth rate is a completely crazy model where people who have wealth would reinvest 100 percent of their return.

In that model the rate of return will be equal to the growth rate, but it’s a completely crazy model. It would be an incredible coincidence if natural market forces alone were to make the rate of return and the growth rate to be equal.

Matthew Yglesias: You show that in France, inheritances have been rising as a share of national income. What about other countries?

Thomas Piketty: In the book I have data for Germany and the UK that show a comparable evolution but data is not equally good in every country. Sometimes inheritance is not very well recorded, and also gifts are not very well recorded so we don't see how much people have given away before they died. But in countries where it’s measured well, we see a large increase.

Pretty much everywhere, including in the US, what you see is that the top of the wealth distribution is rising two, three times as fast as the average wealth, and as the size of the economy, which is certainly evidence fo r bigger than g [i.e., a rate of return on existing wealth that's higher than the overall growth rate of the economy], at least for a large wealth portfolio.

This means that we are, right now, in a stage of rising concentration of wealth. It will stop somewhere, but this "somewhere" can be anywhere. That’s a problem, because I don't think we can just wait for, again, for an incredible coincidence to happen.

I'm not saying the future will necessarily be the worst possibility. There are different forces at play, but I think the fact that there is so much uncertainty about how far it can get is, in itself, a problem. I think we want to find institutions and rules so that we can keep control of these problems.

Matthew Yglesias: What's wrong, exactly, with concentration of wealth?

Thomas Piketty: Well, I think our modern democratic institutions rely on some notion of reasonable inequality. Of course, some inequality is necessary for growth, to create incentives, but it must not become completely extreme.

It was a view in the 19th century that democracy could flourish better in America (or at least in white America) than Europe, in part because you had a more equal distribution of wealth in America. This is something Tocqueville was very impressed by when he visited America.

Until the early 20th century, this was a real difference between the US and Europe. First, because America had a lot of land available for everyone, so everyone can access land. Second, because you have higher population growth and new inflow of population coming in to the United States, the r-bigger-than-g effect was weaker than in Europe. So I think it was easier for democratic institutions to work properly. In Europe prior to World War I, you had 90 percent of national wealth in Britain or France belonging to the top 10 percent. You had basically no middle class.

The historical evidence we have is that our democratic institutions can be captured by the top groups much more easily when you have such an extreme concentration of wealth. To me this is really the main concern.

I think one of the big lessons of the 20th century is that you don't need 19th century inequality to grow. The kind of extreme inequality of wealth that we had, particularly in Europe, in the 19th century and until World War I was just not useful.

It was not useful in the sense that the inequality was destroyed in the 20th century and that didn't prevent growth from happening. Quite the opposite. It probably helped a little bit post world wars. And even if it didn’t help that much, even if growth would have happened anyway, the point is that it did not hurt. Extreme inequality was just not useful. If it's not useful for growth, and if it's bad for democracy, we just don't want it.

Matthew Yglesias: Precisely because it's bad for democracy, I think we'd look at the politics of the Third Republic or the United States today, and it seems unlikely that anything will change.

Thomas Piketty: Yes. People would say the same in 1900, 1910. Everybody will say, "The progressive income tax will never happen. This will never pass." Then this happened, so sometimes things happen. I'm not terribly impressed by the claims that are saying, "Nobody can happen. Nobody will ever take place."

Of course it is true that, in particular in Europe, the wars played a large role in making this happen. Also the Bolshevik Revolution changed the political landscape quite a lot. Many people in the '20s and '30s in Europe accepted tax progressivity because they felt that after all it's better to have taxes than a Bolshevik Revolution.

But if you look in the United States, I'm not sure these things were as important. And still the huge rise in income tax progressivity happened. It happened in spite of the huge inequalities that you had in the US at that time. The democratic system did respond. The Constitution of the US made it, in principle, impossible to have an income tax, and yet it happened.

If you think of the progressive wealth tax today, people say, "This will never happen because property tax is a state matter." But it was the same for the income tax and still it happened.

I'm not saying this will happen in the next five years, but I'm just saying that we should be careful about making predictions of what can or cannot happen, and we should just try to think about the issues and try to see what's desirable and what's not desirable.

I think a system with a progressive tax on net wealth is preferable to a system with a property tax that we have today, and I think the middle class and the lower class would agree.

If you only talk about raising the tax on the rich, I think of course it's more complicated than if you say what you want to do with the money, and who is going to gain from that.

That's a standard strategy of the rich, "I don't want higher tax." They forget to find out the benefits at the bottom and the middle. I think it's a big trick, and it's possible to do away with it.

Matthew Yglesias: In the US, are we going to see in 30 to 40 years a change so that inherited wealth is more impressive, and top managerial income is less so, compared to what we see today?

Thomas Piketty: Well, you can have a combination of the two. It could be that you have both at the same time.

The main risk, is that we actually have two at the same time and that they feed each other. Not only in the sense of the top managers leave large inherited wealth to the next generation, but also in the more symbolic sense in which the existence of very large top managerial compensation is sort of justified by the existence of large inherited wealth.

By saying, "We need very large managerial compensation so that at least some people can manage to accumulate real wealth without starting with this large inherited wealth of other people," you have a sort of race between top managers and top wealth, which I think is a serious risk for all those who are losing in both dimensions.

Matthew Yglesias: Right now, people have the impression in the United States, that wealthy people are mostly like Bill Gates — founders of enterprises rather than inheritors.

Thomas Piketty: Well, when you take the top 50 or top 100 list, you have a lot of inheritors as well. The Walton family, the Koch brothers, etc.

The quick answer is that we don't really know because the wealth rankings of magazines are very much biased in favor of entrepreneurs. First, they are biased in an ideological sense. They have been created in order to celebrate the entrepreneur, although Steve Forbes himself is a grandson of the founder of Forbes. But in addition, the methodology is biased simply because it's much easier to spot large entrepreneurial wealth than large inherited wealth. Large inherited wealth typically takes the form of a more diversified portfolio, whereas large entrepreneurial wealth, when you have created a Microsoft or Facebook, it's difficult to hide.

When people have a more diversified portfolio, it's harder to spot. When I’ve tried to see how the journalists at Forbes or in other magazines in Europe get their numbers, basically they make phone calls, and they try their best. They don't have any systematic registry from which to draw.

I think they are missing the bigger part of top inherited wealth and top entrepreneurial wealth.

Matthew Yglesias: In other words, we’re not going to be able to count Bill Gates' grandchildren’s money?

Thomas Piketty: It will be harder to spot, yes. Already today, you have the Walton family, you have the Koch brothers, you have a number of people with inherited wealth, but frankly we don't know from this data.

To me, one of the main purposes of the wealth tax is that it should produce more information on wealth. I think even a wealth tax with a minimal tax rate would be a way toward more financial transparency. A minimal registration tax on assets, a minimum wealth tax is a way that we can produce more information on wealth, and then we'll see what happens in terms of tax rate.

After all, maybe we'll discover that the Forbes rankings are just completely wrong, and that the top of the wealth distribution is not rising as fast as what we thought and that we don't need such a high tax rate on wealth. I wouldn't mind. Right now, the lack of financial transparency makes it very difficult to have a quiet political conversation and democratic debate about these things.

To me, this is the main worry because people may turn against globalization, or may turn against foreigners, or may decide that Germany is responsible for the problem, or China is responsible for the problem just because we don't manage to have a quiet conversation about a proper tax system. We ought to organize ourselves and do the best out of capitalism and the market economy which, at the end of the day, is a system that has a lot of merit. But we need to find a way that everyone can get to share in this process.


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