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Thomas Piketty's Rx for income inequality: "You don't need to go all the way to socialism"

Aaron Task
Daily Ticker

By his own admission, Thomas Piketty is "better about analyzing the past than the future" and says his much ballyhooed book Capitalism in the Twenty-First Century is "primarily a book about the history of wealth."

But the Paris School of Economics professor has touched a nerve -- The New York Times says he is getting "rock star" treatment -- largely because of the policy prescriptions he's recommending to address rising income inequality, not for providing a 700-page history lesson.

Related: U.S. inequality looks like Europe before WWI: Thomas Piketty

Piketty recommends a "global tax on capital," Specifically, he's calling for a 5% to 10% annual tax on all assets -- stocks, bonds, real estate, natural resources, art, yachts, etc. - owned by individuals with a net worth of a least $1 billion. According to Forbes, a record 1645 people can call themselves billionaires, and thus would be subject to to this "wealth tax".

Piketty's other big recommendation -- "a progressive tax on net wealth" -- would have much broader implications as he's particularly focused on property taxes -- raising them for the wealthiest 10% and lowering them for the rest of us.

The economist and author describes a hypotehtical American couple who has a $490,000 mortgage on a house worth $500,000. "They are not rich. Their net wealth is $10,000," he says. "A progressive tax would reduce the property tax paid by the bottom 90%...and increase it on the top wealth group."

Such a tax would help homeowners currently under water on a mortgage, encourage home ownership and address a situation where all Americans receive the same proportional tax break on homeownership, regardless of their net worth or size of the home.

"One way to have broader access to wealth is to reduce the tax on the large group and increase the tax on the very top so concentration of wealth doesn't get to extreme levels," he says in the accompanying video.

America grew much faster than Europe in the 19th century "in part because there was a lot of land" and there was "access to wealth not only for tiny elites," Piketty notes. "You need some inequality to grow...but extreme inequality is not only useless but can be harmful to growth because it reduces mobility and can lead to political capture of our democratic institutions."

Of course, the devil is in the details: How do you define "extreme" levels of inequality?

"Right now the bottom 50% of the population of the U.S. own 2% of national wealth and the next 40% owns 22%," Piketty says. "It's not a lot. You don't need to go all the way to socialism to believe 2% could be improved - it could be 5%, it could be 10%. There's room for improvement."

Most mainstream economists wholeheartedly agree there's 'room for improvement' -- but how to do it and what's politically feasible are two very challenging complications. That said, kudos to Prof. Piketty for kicking off a heated debate among academics and policymakers, which he claims was the goal all along:
"I'm not defining the limits" of inequality, he says. "I'm giving historical evidence and then everybody is free to draw their own conclusions."

Speaking of which, watch the accompanying video to hear Piketty's response to Yale Professor Robert Shiller's claim that the book is "impressive in its wealth of information but short on solutions."

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.

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