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Monday 1 September 2014

Ireland's top tax rate just 'nonsense', says Piketty

Nobel-tipped economist argues for redrawing tax based on 'real' wealth

Brendan Keenan

Published 22/06/2014 | 02:30

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French economist Thomas Picketty at the TASC conference in Croke Park. Photo: Gerry Mooney
French economist Thomas Picketty at the TASC conference in Croke Park. Photo: Gerry Mooney

A PROPERTY tax should apply to both real estate and farming land, but be based on net value, after mortgages are deducted.

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That is the view of Thomas Piketty, the French economist and social scientist whose book on the concentration of wealth has become a run- away success and made him a hot tip for a Nobel Prize for economics.

Prof Piketty's controversial finding is that wealth automatically accumulates faster than economic growth. The greater the wealth, the faster it grows.

Speaking to the Sunday Independent on the fringes of a Tasc conference on equality, Prof Piketty said the trend may be about to get worse. "If, as many believe, Europe and the wider world are heading for a period of low growth, and capital grows at its historical rate of four per cent to five per cent a year, then the difference between the top 10 per cent and the rest will widen."

The destruction of wealth in two world wars and the Thirties depression narrowed the gap, as did rapid economic growth from 1950 to 1980, but it has been widening since. "In 1987, billionaires owned 0.4 per cent of global wealth. Now they hold 1.5 per cent – which restores the proportion before the 2008 crash."

His solution is steeply rising taxes on wealth and high incomes. The top rate on earnings above €2m a year could reach 80 per cent, with different high rates at €500,000 and €1m a year.

He blames low tax rates – he includes the 52 per cent rate in Ireland – for the explosion in top salaries for bankers and senior executives.

"If you're paying 50 per cent, it is well worth getting a €1m pay rise. If 80 per cent is going to go on tax, it changes the whole situation.

"That was the ratio in Britain when it had taxes of this level in the Sixties. The USA also did it in the Thirties, although continental European countries never went that high.

"The extraordinary thing from my data is that the share of wealth belonging to the top 10 per cent in France is the same as it was before the Revolution. It is as if the ancien regime had never come to an end."

But he is shocked that the Irish top rate kicks in at below-average earnings.

"That is nonsense. You have to be very careful about the marginal rate that you apply to particular incomes," he said.

On property, Prof Piketty said it is a mistake to tax on gross value, ignoring the amount of debt owed.

"It should be net value. Most people's net wealth is quite modest, so they would pay less than under the present property tax system.

"Those with larger net values, because of small or non-existent mortgages, would pay more. You cannot ask people with a mortgage to pay the same contribution as those who don't have one.

"Such a change would turn the Irish property tax into a wealth tax, instead of a charge for services as it is essentially at present. Those with large amounts of net wealth would pay more than under the existing tax, but those with borrowings would pay less. Farming land should be treated as net wealth in the same way."

His book, Capital in the 21st Century, uses some ingenious methods to show how wealth grows faster even than overall output. One is the investment returns of US universities. The three giants, Harvard, Princeton and Yale, have funds of over $15bn each and earn more than 10 per cent a year on their investments. Colleges with less than $100m earn six per cent a year.

He also cites Liliane Bettencourt, heiress to the L'Oreal cosmetics fortune. Her $25bn wealth has been growing at 10 per cent a year since 1990 – the same rate as that of Bill Gates, founder of Microsoft.

"The L'Oreal founder was a great entrepreneur, but that was 100 years ago. It does not seem right that the wealth should be still growing at the same rate as one of today's great entrepreneurs," Prof Piketty said.

"You can extend the trends and show that by 2050 the richest 10 per cent would own 60 per cent of global wealth. I don't think people will allow that to happen, but there is a threat to democracy if it is not dealt with properly."

His suggestions for a steep wealth tax and confiscatory income taxes had provoked furious reactions, especially in the US. Any suggestion of a wealth tax on property and land might do the same in Ireland.

Some economists have challenged the book's figures, but most think the broad conclusions stand up. "I do not mind the criticism. My object was to stimulate debate, and I think I can say I have done that," Prof Piketty said.

Sunday Independent

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