On a global wealth tax, automation, and human trafficking.


If you wanted a super-brief summary of Thomas Piketty’s Capital in the Twenty-first Century (which I’ve discussed in a previous essay, here), it’d probably be: “Piketty presents extensive historical data to demonstrate why we ought to have a global wealth tax, followed by a brief, snappy, depressing summary of why we won’t have one anytime soon.”

And the book is good.  Maybe longer and dryer than many people have the stomach for, but it’s an excellent piece of scholarship.

That said, I wanted to write a piece about two additional arguments for why we ought to have a Piketty-style wealth tax.  I assume the reason why these ideas were left out of his book is not that he didn’t think of them — he seems like a very smart guy — but that he wanted to restrict himself to un-argue-about-able history and numbers.  But since I’m writing sloppy essays for a personal website, not a rigorous tome that other economists will settle in piranha-like to dissect, I get to include these thoughts.

First, a slightly-longer summary of Piketty’s message (presented in a super-non-rigorous manner; my first draft of this essay was very different, but K said it was too academic.  If anyone wants a more accurate, less readable description of this, feel free to send a comment and I’ll add a footnote to this) is that there are two types of income: from labor and from capital.

You can make money by doing things, or you can make money by owning things and having people pay you to use them.  Generally when the share of income derived from labor is low relative to the share of income from capital, people revolt.  The world seems unfair, it’s easy for the rich to become richer, etc.

Probably you’ve seen this by now, but if you haven’t, you should check out this clip from Frans de Waal’s TED talk on inequality where monkeys react petulantly to unfair treatment.  Then, instead of a monkey with a slice of cucumber, imagine you’re dealing with billions of young people born into poverty, in a world where it’s not so hard to acquire military-grade weapons.

The main purpose of a global wealth tax, as proposed by Picketty, isn’t to raise money (although that’s a nice consequence of it, because many governments could use a bit more money to maintain good roads, worthwhile education, public safety, etc.), but to lower the rate of return on capital.  A tax on wealth cuts into what you can earn by owning stuff, which could make the ratio of income derived from capital to income derived from labor smaller, which many people would think was more fair.

Most people intuitively like to see hard work rewarded, and aren’t as keen on seeing people with inherited fortunes become more and more wealthy simply by reinvesting dividends.  And a wealth tax would probably have to be progressive: large holdings typically yield higher rates of return than small holdings.  Just consider the astronomical returns for Harvard’s multibillion dollar endowment versus the interest rate you can get on a small bank account, or $2k minimum certificates of deposit, or even a well-managed million-dollar portfolio of holdings.  There’s no way you could compete — a large endowment can afford better advisors, make riskier gambles, and meet minimum thresholds for investments that a small fish would never have access to.

And that leads into my first addition to Piketty’s argument.  He used only historical data to make his point.  That is, he ignored (purposefully, to make his reasoning as compelling as possible) any speculation about the effect of technology change on his proposal.  But it’s widely recognized that improved technology will allow more and more work to be automated, which will drive down labor’s share of income and raise capital’s share.  Sue Halpern’s lovely article, “How Robots and Algorithms Are Taking Over,” drew my attention to a Paul Krugman quote that nicely encapsulates this idea:

“Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people.  So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots.”

Which is to say that, even if you’re less liberal than I am and think our current distribution of income between capital and labor is equitable, better automation will make this distribution unfair in the future.  Especially because there is no a priori reason to expect there to be any share of income derived from labor in an extrapolated technological utopia.

(Brief justification for that last sentence: The European Union is pulling back from the Human Brain Project for now, but there are still a lot of smart people working on using computers to simulate the human brain.  Unless you believe thoughts arise from an immaterial soul, it seems pretty clear that they’ll succeed eventually, in which case it would seem that there will be no task a human can do that a machine could not also do.)

In summary, a steady rise in the share of income flowing to capital will make the rationale for a global wealth tax more and more compelling as our technology advances.

My second addition to Piketty’s argument is that the infrastructure necessary to impose a global wealth tax — obviously a massive accounting project that every country would have to collaborate openly on — is the exact same infrastructure that we’d need to combat the money laundering that funds human trafficking and terrorism.

Because there is no interconnected set of records for international wealth transfers.  In Treasury’s War Juan Carlos Zarate argues, somewhat unconvincingly in my opinion, that there was, but even he admits that this is becoming less and less true all the time. The proceeds from the sale of sex slaves (or drugs, sure, but given that I think most drugs should be legalized and regulated, and obviously think that slavery should stay illegal, I’m not as concerned about drug trafficking, although it’s worth noting that the same people and organizations often dabble in both) can easily be disguised as legitimate earnings (check out the money laundering chapter in Lydia Cacho’s excellent Slavery Inc. for more info).  Regardless, the absence of a transparent global finance system abets criminals.

Not that the banks, legislatures, dictators et al. who would have to collaborate on a connected system to impose a global wealth tax are likely to be swayed by these additional arguments any more than they would be by the litany of rationales presented in Piketty’s book.  After all, for any individual, the higher the percentage of income derived from capital, the less that person would want a wealth tax… and those who run banks and governments tend to be wealthier than average.  Their incomes are unlikely to drop (at first) as our society becomes increasingly automated, and their children generally aren’t trafficked into slavery or sexual exploitation.  So it goes.