Thomas Piketty says economic inequality has been getting greater in the world, and will get greater. What about New Zealand?

Paul Krugman has said "Thomas Piketty has transformed our economic discourse; we’ll never talk about wealth and inequality the same way we used to". Many other eminent economists have said much the same thing. If they are right economics is going through a paradigm shift – a change in the way the discipline (and the public at large) thinks and the issues which it addresses.

It is hard in the middle of a paradigm shift to know what exactly is  happening. The stories we tell about previous shifts is that a great man or women had an idea, they published it, and it was immediately adopted by the entire profession. Histories show that in fact each transition was much more muddled, and those in the middle of the longish period over which it took place were often puzzled about what was new, what was important, and how the new paradigm reconciled with the known facts or suggested the pursuit of new ones.

The challenge arises because Piketty asks questions about issues which have been almost entirely forgotten by most economists, even if they were once important. Piketty’s book’s title,  Capital in the Twenty-First Century, alludes to Karl Marx but before him David Ricardo was intensely interested in how, in modern parlance, GDP was distributed between the social classes.

With a few honourable exceptions, modern economics has largely ignored questions of how income and wealth is distributed. I doubt there are many New Zealand economists who are properly trained in distributional economics. That means New Zealand economics is unlikely to be at the frontier of any paradigm shift. We are excellent at taking up anything fashionable providing it is not too analytically difficult; recall the speed with which we seized on neoliberalism. But when it comes to real revolution we lag decades behind.

All professions find sharp paradigm changes difficult. Some of the critics of Piketty are not just elderly gentlemen (and indeed not so elderly ones) fearful of something they dont understand and concerned their status will be downgraded. There are also those who are acolytes of the rich. While they may not understand the intellectual implications of the Piketty revolution. they certainly understand the way it focuses on their rich clients. Commonly their approach is to misrepresent Piketty’s analysis  – it has already happened in New Zealand.

A complication is that Piketty has a theory about the income distribution of the whole world. I have carefully replicated his empirical work in New Zealand and found that, over the last three decades, our Inland Revenue statistics do not show any increase in the share of market incomes of those at the top.

You may at first be surprised. Just about everyone knows that there has been a sharp shift in the after-tax household income distribution. In the early 1980s, the top decile in households, had a 20 percent share; now it is about a 25 percent share. (That is a huge shift.)  But that is households not the individuals with which Piketty is concerned. Moreover households may have multiple income recipients and they may have children.

But we are also comparing before-tax with after-tax distributions. We can show the big shift over the thirty years was due to the reductions in income taxes on those at the top, and the slashing of the real level of social security benefits in the late 1980s and early 1990s.

Piketty is not concerned with after-tax incomes but before-tax ones. His thesis is that the income share of the rich is growing because of changes in market and ownership circumstances, not because the tax system is being twisted in their favour (as it has).

Why is there no perceptible change in the income shares of the top of New Zealand’s population – event the top 0.1 percent? My paper suggests two main reasons.

First, there seems to be a growth in trusts following a change in the law in the early 1990s. As far as I know, nobody has systematically studied this. But trusts need not markedly increase inequality.

Second, New Zealanders who live here for less than six months have only their New Zealand income taxed here. Their offshore income is taxed offshore – possibly at a much lower rate. Of course a prudent rich New Zealander will invest a lot of their capital offshore for good financial reasons of portfolio diversification but that is no reason for living somewhere else.

The three ‘New Zealand’ billionaires who appear on the Forbes Rich list – Graham Hart; $5.3b at 229th; Richard Chandler; $2.85b at 502th; Christopher Chandler; $1b at 1342th – are tiddlers compared to those at the top; in any case, they dont live in New Zealand and probably hold only a small share of their wealth here.

I have mixed feelings about whether we should give such a generous exemption. Such people will be treated as New Zealand citizens for many purposes; they may vote, lobby and fund lobby groups, be awarded royal honours and so on. Yet they don’t pay income tax on all their income. As the famous American jurist, Oliver Wendell Holmes, Jr said: ‘Taxes are the price we pay for civilization.’ The unkindly may say that too many of our New Zealand rich are less than half civilised.

The US has begun to chase up the offshore income of its citizens;. Should we? That is the conclusion that Piketty came to.

 

This note was prepared for the launch The Pikety Phenomenon published by BWB books, a series of essays by New Zealanders (mainly economists) responding to Piketty’s thesis.

 

Comments (10)

by Lee Churchman on October 29, 2014
Lee Churchman

Well, if he's right that increasing inequality and a patrimonial economy are natural results of the capitalist mode of production, then I think that would be an extremely big deal. From my discipline it's hard to think of any credible theory of distributive justice that would justify such entrenched and radical economic inequality.

by Fentex on October 29, 2014
Fentex

We are excellent at taking up anything fashionable providing it is not too analytically difficult; recall the speed with which we seized on neoliberalism. But when it comes to real revolution we lag decades behind.

That reads as extremely patronising, especially if the reader assummes the author excludes themself from the so easily dismissed and misled hoi polloi.

A country that was quite quick to take up the eight hour workday, universal suffrage and many social economic reforms including no fault insurance ahead of others is not a country with a impoverished history of refusing revolutionary economic thinking simply because the most recent generations have displeased the author.

And it seems inaccurate to dismiss the events of the 1980's in NZ as not 'revolutionary' simply because they were neo-liberal. I rather think they were revolutionary. They certainly can't be described as evolutionary.

I think inequality is a tremendous danger to society because wealth is power and power acts to protect itself. Imbalance will tend to corrupt political process to ensure it remains tilted.

And there's little novel or revolutionary about that thought. It's as old as the ancient philosophers who first questioned the motives of oligarchs and aristocrats and the naturalness of their asserted place in the world.

So should we dimsiss the concern for not being revolutionary or is that really a silly criteria to critique thought by?

The world needs an agreement on the location of tax liabilities so the wealthy and nimble cannot leverage countries and jurisdictions against each other. Uncooperative jurisdictions need to be frozen out of commerce. The odds are any effective agreement of such will tend to involve an agreement on levels of taxation as well even if solely to enable agreement to be reached by removing the friction of competition.

The fearsome ambition that entails would also serve to police inter-state funding of violence so it could benefit the world in more than one way. Though obviously that's a double edged sword giving established powers, the very concern that imbalances in wealth and powr raises. leverage against smaller states.

Obviously increased transparency and regulators of freedom of information with teeth can go a long way towards minimising cronyism and the favouritism given the heavy hands of wealth resting on government scales of judgement.

by Charlie on October 29, 2014
Charlie

Another commentary on Piketty:

https://www.interest.co.nz/opinion/72590/crime-not-being-rich-crime-we-d...

Everyone is quoting Picketty but nobody has bothered to read the book - you wouldn't, because it's a very tedious doorstop!

 

by Lee Churchman on October 29, 2014
Lee Churchman

I rather think they were revolutionary. They certainly can't be described as evolutionary.

"Reactionary" would be a better term. David Graeber has an interesting article about this somewhere.

by Lee Churchman on October 29, 2014
Lee Churchman
by Tobias Barkley on October 29, 2014
Tobias Barkley

Regarding the effect trusts have in NZ.

I practiced in trust law for a short period and would guess almost all wealthy NZers have a family trust in which they put all income producing property (and property that increases in value - capital gains). I think this would make it very difficult to directly apply Piketty's principles to NZ income data.

How it works is that these trusts are discretionary, which means the property in them, according to legal definitions, does not belong to any particular person and so is not counted as any individual's wealth. Although these trusts earn quite a lot of income, only some of that income is distributed out to be consumed (and reported as income) by individuals; the rest is accumulated and reinvested within the trust. Of course, the trusts remain able to be accessed by those that set them up, pretty much whenever they like - in legal theory the property is given away, but in practical reality it belongs to the people who set it up.

So the Piketty effect (r > g) could still be increasing the wealth of the top decile, but it may just be that most of the information we have available is about the top decile's personal exertion income rather than that income from capital or capital growth.

Part of this can be seen in this IRD graph where a lot of income is being kept in trusts as 'trustee income' and much less is being paid out to individuals. It looks like the amount of wealth in trusts should be increasing significantly through this retained income plus capital appreciation of trust property.

However, I don't know how significant this accumulated capital is compared to incomes that are taxed to the individual. For example, total income earnt by individuals in 2012 was about $130 billion but the total trustee income was about $7 billion which seems relatively small - 5%. That is, I have no idea whether enough wealth has built up in these types of trusts so that it has a significant effect on measuring the income or wealth of our top decile.

by mikesh on October 30, 2014
mikesh

Much wealth could be tied up in limited liability companies, both listed and unlisted.

by John Hurley on October 31, 2014
John Hurley

How can you talk about inequality without mentioning property and the tax regimes and politicians who protect the property investor.

“Creating wealth, security and financial freedom is often an investor’s ultimate goal. 90% of millionaires get there by investing in real-estate”

New Zealand has strong population growth due to its progressive immigration policy and birth rates. Many parts of the country are experiencing housing shortages translating into strong tenant demand and price growth. This trend is expected to continue with recent population projections by the New Zealand Department of Statistics forecasting up to 64% growth over the next 17 years. Auckland city is predicted to almost double its population in the next 40 years. For property investors, this represents outstanding potential growth in demand and return on investment. New Zealand’s property prices are also relatively undervalued compared to its closest neighbour Australia.

http://www.nzps.com/

by Brian Easton on October 31, 2014
Brian Easton

Fentex talks about particular policies. I was concerned with paradigms. For the record, the neo-liberal paradigm was known to have deep flaws when we began adopting it in the Rogernomics Revolution. It is worth remembering that we have backed down on much (almost all?) of the neo-liberal extremism. Its ideology persists. 

Charlie: I read Piketty while my friends were reading The Luminaries.

Tobias Barker: Thankyou for elaborating on the way trusts work, while Milkesh is quite right, I should have mentioned private companies as another means of tax avoidance. (They are idiscussed n the research report I wrote.)

John Hurley: Aggregate wealth includes property, and the Piketty analysis includes the mechanisms you describe. Insofar as we have no capital gains tax they are especially powerful in New Zealand.

by Fentex on November 10, 2014
Fentex

 It is worth remembering that we have backed down on much (almost all?) of the neo-liberal extremism. Its ideology persists. 

Before the 1980's to import into NZ you had to be a privileged holder of an import license relevant to the imported product. All infrastructure was a state monopoly. No business happened on a Sunday and little on a Saturday. These are the most obvious signs of a constricted economy that has passed into history that come immediately to my mind.

NZ has not backed down from fundamental changes and liberalisation in our economy, and I think suggesting it has is a confusion about extremes we baulked from.

NZ has not retreated from being a liberal economy, we have merely settled into what we are currently comfortable with, which is by comparison considerably more economically liberal than thirty years ago.

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