It is not often that a book dealing with economic and financial matters creates vibrant discussion in the wider society, as has been the case with Thomas Pikkety’s Capitalism in the 21st century.

Pikkety tracked, amalgamated and analysed data related to income and wealth in various countries going back two centuries and concluded that inequality in various countries, but particularly in the United States, has now grown to the same levels that were last seen in La Belle Époque[i].

His argument is that, unless we wish to go through the same experience as that of the 20th century – where excessive inequality was scaled back by the horrors of two world wars that sandwiched the great depression of the 1930s, governments should set economic policies that reduce excessive inequality.

The beneficiaries of present inequalities have used all the arguments in an attempt to discredit Pikkety and defend the status quo. They have depicted him as a reincarnation of Karl Marx with a mission to destroy capitalism and restore a socialist society. This is a gross exaggeration, as Pikkety in no way challenges the benefits of controlled capitalism that must tolerate substantial inequality among society to ensure that people are motivated to deliver to the best of their abilities. There is no argument about the power of fair capitalism to extract people out of poverty – as is happening in China, India and other emerging markets that are giving a fair chance for the markets to work, while controlling excesses.

Pikkety’s core argument in his 700-page book is that capitalism builds its own dynamics that concentrate wealth in the hands of the few and if such dynamics are allowed to build on their own momentum, especially considering the rent-seeking potential of those in possession of excessive wealth, then within a generation wealth will be in the hands of very few, who inherited their riches, and this would become socially less acceptable than when wealth is the hands of the few that can actually claim to have worked for it. Basically, he argues that society can accept that Bill Gates[ii] is super rich because he pioneered Microsoft but will struggle to maintain acceptance if Bill Gates’ wealth is inherited by his (not necessarily deserving) descendants.

Unfortunately, as with so many things in life, the diagnosis comes more easily than the solution. Pikkety recommends the introduction of a global wealth tax, but this is as feasible as Honduras winning the Brazil World Cup. However, the absence of a practical solution does not mean there is no problem.

To some extent, we can argue that in Malta we do not have a problem of extreme inequality and that somehow we have hit a fair balance between having sufficient inequality to maintain the enterprise spirit to generate growth and development and offering a social structure that prevents extreme poverty. We have also adopted policies that maintain fairly good equality of opportunities, giving flexibility for people to move up the social ladder according to their skills rather than their parentage.

In this context, one can understand the importance of free education up to university and beyond, the stipend system which give students from families in low levels of society a fair chance to overcome the social barriers that would otherwise condemn them eternally to their low social status, and the free health care system. We must ensure sustainability of such policies that have protected the social fabric of society and we must avoid the extremes one finds in the USA, where the atrociously poor share sovereignty with the incredibly rich. To maintain such sustainability, we must inevitably question from time to time whether the system can carry the load of universality, with the rich and poor being equally entitled to free health care rather than focusing the scarce resources of the public purse only on those that cannot afford to pay for it.

This brings me to the need for, from time to time, challenging the status quo entrenched in our systems of taxation and opening a debate about whether changing circumstances merit using our systems of taxation in the 21st century.

We have a system of taxation that discriminates in favour of unearned income and against earned income. Whereas earned income is taxed at 35 per cent at the margin for annual income over €60,000, we have final withholding tax at 15 per cent on a variety of unearned income (investment income and property rental) irrespective of their quantum. Furthermore, we have no taxation on capital gains.

We have to open a discussion about whether this is socially just and whether it is conducive to becoming an economy based on enterprise rather than on rent seeking. We have to take into consideration the fact that, in order to protect our attraction as an international investment centre, we have to continue reducing direct tax rates. This could be forced on us by international competition and could address the offensive differential in tax rates applicable to earned and unearned income. However, how would government protect its finances while reducing direct tax rates to competitive international levels? Probably, it will have to make up for the loss of direct tax revenue by compensatory increases in indirect tax rates and by relying on taxes on capital rather than taxes on income.

Which brings us back to many of Pikkety’s arguments. Should capital gains continue to remain tax exempt? Not even in the conservative USA are capital gains completely tax-exempt, although they are taxed at a much lower rate than earned income.

Should we continue to tax earned income at the highest rates but exempt inherited capital other than real estate completely from inheritance and donation taxes? And why should real estate be treated differently from other classes of asset, simply because it is less mobile and more visible?

There are no easy answers to these questions and changes to taxation systems have to be made with hands that have the sensitivity of a brain surgeon. But this discussion has to start among society so that our political leaders will acquire the courage to plan the necessary changes for the longer term in the knowledge that society has been involved and all points of view have been taken into account.

www.alfred-mifsud.blogspot.com

[i]La Belle Époque was a period in history that is conventionally dated as starting in 1871 and ending with the start of World War I in 1914. This period was characterised by optimism, peace in Europe and new technology and scientific discoveries. The peace and prosperity in Paris allowed the arts to flourish and many masterpieces of literature, music, theatre and visual art gained recognition. La Belle Époque was named, in retrospect, when it began to be contrasted with the horrors of WWI.

[ii] In the particular case of Bill Gates, most of his wealth has, in fact, been donated to his charitable foundation so he may not be a fair example of the risks that Pikkety defines.