The year 2014 marks the 50th anniversary of the Beatles’ arrival in the United States. The Allies liberated Paris 70 years ago. And, of course, it’s been 135 years since “Progress and Poverty,” by the American journalist Henry George, was published in 1879.
What’s that? Never heard of George or his treatise on the causes of inequality? It sold 3 million copies. Perhaps you missed “Progress and Poverty’s” anniversary while perusing this year’s equally improbable bestseller, “Capital in the Twenty-First Century” by French economist Thomas Piketty.
With its sweeping review of historical data, culminating in a warning about capitalism’s inexorable, destabilizing, tendency toward inequality — to be cured by a global wealth tax — Piketty’s book has earned comparisons with “Das Kapital,” by Karl Marx.
Yet Piketty’s project may have more in common with George’s book than Marx’s, and not only because each tome reached U.S. readers six years after a ruinous financial crisis — the Panic of 1873 for George, the 2008 collapse of Lehman Brothers for Piketty.
Analyzing the stagnant economy and rich-poor gap of his day, George blamed not free markets, which he considered efficient and fair, but their corruption by a privileged few.
Specifically, George argued, land owners commanded a high and growing share of U.S. income even though their claim to it was based on something as unproductive as mere ownership — as opposed to the laborer’s work effort or the investor’s risk-taking.
For George, the solution was to abolish all taxes except a “single tax” on the value of land. Since land could neither be created nor destroyed, taxing it would reduce neither society’s total wealth nor owners’ incentives to put property to productive use — buildings and other improvements wouldn’t be taxed.
To the contrary, taxing land, and only land, to pay the government’s bills would liberate labor and capital to seek their most productive use and thus to grow the economy. A huge source of unearned wealth would be curbed, if not eliminated. Capitalism would be redeemed and democracy saved.
“It is not enough that men and women should vote,” George wrote (including a gender that could not, at that time, cast ballots). “They must have liberty to avail themselves of the opportunities and means of life; they must stand on equal terms with reference to the bounty of nature. . . . This is the lesson of the centuries. Unless its foundations be laid in justice, the social structure of the United States or any other country cannot stand.”
Similarly, Piketty’s concern about the tendency of the return on capital (which he defines to include real estate as well as financial wealth) to exceed economic growth is essentially a worry about growing unearned claims on society’s resources.
To Piketty, like George an admirer of market efficiency and opponent of protectionism, the resulting accumulation of wealth in relatively few hands threatens economic fairness, economic dynamism — and democracy. “Extreme inequality makes it impossible to have proper working of democratic institutions,” Piketty told a recent meeting at Washington’s Urban Institute.
And so, updating Henry George’s single tax, Piketty proposes a global wealth tax, making similar claims about its benefits for both equality and growth.
For Piketty and George, the bottom line, both moral and economic, is to socialize “rent” — rent, that is, not in the colloquial sense but in the economic sense of income disconnected from productivity.
It’s an attractive vision: an egalitarian, productive society, purged of parasitical rent-seeking through the expedient of well-aimed taxes.
Alas, Piketty’s global wealth tax and George’s single tax suffer from the same defect, and it’s not political impracticality — after all, George nearly got himself elected mayor of New York City in 1886.
It’s the inherent difficulty of separating the productive, untaxed component of the return on land or capital from the unproductive, taxed part.
Clear in the pages of a treatise, the distinction is murkier in practice. The market price of a vacant lot can reflect potential productive uses, as well as the risk a buyer takes by betting on them. A similar analysis applies to the rate of return on capital.
As a result, it’s hard to devise a tax on wealth that raises a significant amount of revenue but doesn’t discourage at least some socially beneficial saving or entrepreneurship. The potential for adverse unintended consequences — economic and political — is greater than Piketty seems to realize.
Great private fortunes can indeed entitle their owners to an undue share of society’s current income and political power. At times, however, private wealth can serve as a font of charity or, indeed, a bulwark against government overreach.
We’ve been debating the right balance since the 19th century and probably will be long after the 21st.