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The United States of Envy

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Allan H. Meltzer, a distinguished fellow at the Hoover Institute, takes a look at the book, Capital in the 21st Century by Thomas Piketty that is all the rage among liberals this week. Meltzer writes:

Voters who will hear the Obama call for envy and redistribution should ask themselves and others: Would you prefer to live in an America where the market is dynamic and opportunity abounds, or in France, where unemployment is high and tax rates are crushing? Don’t you prefer opportunity to envy?

Good questions. Here is an excerpt from his article.

By Allan H. Meltzer

Income redistribution will lead to high unemployment, crushing tax rates, and the end of innovation.

In advance of the 2014 election, the Obama administration has drawn the political discussion away from its unpopular and flawed healthcare plan, usually called Obamacare, to bring public attention and support for increased income redistribution. President Obama openly encouraged envy of the top one percent of income earners. Reducing the share received by the highest earners to provide revenue for larger transfers to the lowest earners has long been a main objective of his administration. We can all expect this theme to be trumpeted loudly by the mainstream press as the mid-term election approaches: Some of us can have more, the argument goes, if we force others to have less.

Support for the alleged social benefits of setting much higher marginal tax rates on the highest incomes has now been endorsed by the International Monetary Fund, based heavily on research by two French economists named Thomas Piketty and Emanuel Saez. The two worked together on the faculty at MIT, where the current research director of the IMF, Olivier Blanchard, was a professor. Like Piketty and Saez, he is also French. France has, for many years, implemented destructive policies of income redistribution.

Professor Piketty collected data on income distribution from approximately 20 countries over periods of different length. He concluded that raising the tax rate to 60 percent on the highest incomes and redistributing the receipts to the poor would increase spending and economic growth. The New York Times declared his book, Capital in the 21st Century, one of the great achievements of modern economics. It put it in a class with Karl Marx’s Das Kapital and John Maynard Keynes’s General Theory.

This lavish praise seems both wrong and extreme. I agree that in the past there was a notable positive association between economic growth and the spread between the shares of income going to the top 1, 5, or 10 percent of the earners and the share going to the remainder. The mistake is to conclude that narrowing the distribution contributes to growth. The far more plausible explanation is that economic growth in capitalist countries over the past two centuries contributed to a steep decline in the share of the top earners.

Simply put, Piketty, President Obama, and the IMF have the causality running the wrong way. Taxing the rich to redistribute did not produce growth. On the contrary, growth reduced the share earned by the highest earners.

Read more: Hoover.org

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