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Celebrated French economist Thomas Piketty shot to fame for his writings on inequality. Could his arguments lead to wealth taxes in New Zealand? By Danyl McLachlan.
In August 2014, a two-year-old girl from South Auckland, Emma-Lita Bourne, died of a brain haemorrhage after being admitted to Starship Hospital. The coroner's report determined that the damp, cold conditions of the girl's home – owned by Housing New Zealand, the government housing agency now rebranded as Kāinga Ora – may have contributed to her death. In the wake of the tragedy, media attention focused on the terrible housing conditions experienced by hundreds of thousands of children growing up in poverty here.
Public health researchers had long warned that these could have dire health consequences. In a 2021 paper co-authored by epidemiologist Michael Baker, researchers found that damp and mouldy housing accounted for a "substantial proportion of the burden of disease in New Zealand". They estimated that it caused 229 deaths annually, with a total cost to society of about a billion dollars.
These are deaths of inequality. Children from middle-class or wealthy families are unlikely to be hospitalised for rheumatic fever or bronchopneumonia, the illness that led to Emma-Lita's death.
France's "celebrity economist", Thomas Piketty, has spent his career arguing that inequality is the central problem in economics. He believes that, instead of focusing on growth or wealth creation, free-market economies such as New Zealand must recognise that we don't allocate our resources morally or efficiently. He argues that the wealthiest have so much money that it distorts our politics, while the very poor have so little that they can't afford to keep their children warm, well fed and healthy, or, in extreme cases, alive.
This year, Piketty published A Brief History of Equality, aimed at making his work more accessible. Its New Zealand publication coincided with a speech by Revenue Minister David Parker that raised questions about inequality in our own tax system.
Economics is often seen as a dry topic – a monotone of statistics, charts, graphs, data – but these are attempts to map the complexity of the world, and whether you see beauty or danger in such landscapes probably depends on your vantage point.
Participatory socialism
Piketty was born in Paris in 1971 to parents who were "soixante-huitards" – members of the radical revolutionary movement that nearly brought down the French government in May 1968. They'd drifted towards the centre by the time Piketty was old enough to talk politics with them.
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Advertise with NZME.In 1991, when he was a university student studying mathematics and economics at École Normale Supérieure, the elite institution at the apex of French intellectual life, Piketty visited the Soviet Union. It was in an advanced state of disintegration and the experience convinced him to support free markets and private property. However, he radically transformed both of these concepts.
In 2014, he became an intellectual superstar when he published Capital in the Twenty-First Century, a nearly 700-page treatise on how capitalist economies distribute wealth. Like most of Piketty's work, it relied on deep dives into historical data sets: census records, property databases and inheritance statistics dating back to the French Revolution. He used these to formulate his "laws of capitalism", which argued that an increase in inequality and the concentration of wealth into the hands of a tiny elite was an inevitable outcome of the capitalist system. The only way to prevent it was extensive state intervention.
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No one was more astonished than Piketty when his book became a global bestseller. But with that success came controversy. Defenders of free markets attacked his methods and conclusions, while orthodox socialists were aghast at his criticism of Marx and Marxism.
Shortly after the English translation of his book was published, Piketty modified his thesis. His "laws of capitalism" weren't really laws, he announced, they were just what he observed in the historical data. Inequality wasn't inevitable — it was a choice that societies made. Or, rather, it was the inevitable result of choices made by politicians. Poverty and inequality were outcomes of the policies, laws, values and institutions that constructed the economy. Economics is downstream from politics, he argued, and politics is downstream from ideology.
He expanded on these ideas in his 2020 book, Capital and Ideology, which was an even more ambitious study, ranging across the world and back through most of human history, ending with his prescription for "participatory socialism", a radical reimagining of the political economy.
This, he believes, is his definitive work. It was hard to read, though: more than 1000 pages of dense macroeconomic history and data analysis. So now he has produced A Brief History of Equality, which is a shorter introduction to his world view.
The great redistribution
The good news is that, contrary to popular belief, life in capitalist societies is improving. Piketty is all about the long view, and he celebrates that the past 150 years have seen the rise of the welfare state and a dramatic extension of life expectancy, literacy and individual freedom.
Capitalism in the 19th century consisted of a very wealthy, mostly hereditary elite who owned almost everything. They ruled over a vast and impoverished working class and a state that spent most of its revenue on the military, police and prisons.
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Advertise with NZME.In the early and mid- 20th century, those economies, including New Zealand, saw "the great redistribution", which included higher levels of taxation, especially on the wealthy; funded education, health and welfare systems; state-built schools, hospitals and public housing. And these healthy, educated populations generated phenomenal innovation and economic growth. Progressive causes such as the feminist, gay rights and civil rights movements resulted in new forms of liberation.
"There has been a long-term movement over the course of history towards more social, economic and political equality," Piketty notes. His point is that we should be bold and optimistic, because radical, transformational change is possible.
There is also bad news, however, because many things are still awful, and in some ways they're getting worse. The great redistribution ends around the 1980s, with the rise of what Piketty refers to as hypercapitalism, but everyone else calls neoliberalism: a political economy organised around free trade, globalised financial markets, deregulation and a low, broad tax rate.
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The promise of neoliberalism was that it would deliver phenomenal economic growth. Once we freed the wealthy from the crippling burdens of taxation and regulation, the rising tide of innovation and prosperity would lift everyone's boats. Unfortunately, none of these predictions came true. Instead, the opposite happened, and the past 30 years has seen anaemic growth and increased inequality. The wealthy have more, while everyone else's boat is slowly sinking.
Where has the left been during the neoliberal period? What happened to the mighty coalition that built the modern welfare state and shook the world? Piketty has a two-fold explanation. He believes the collapse of communism induced the traditional left into a state of intellectual exhaustion. And since then, left-wing institutions and political parties have been taken over by what he terms the "Brahmin Left" (named after the highest caste in Indian society).
This is the faction of the richest 10 per cent who comprise the technocratic, educated class. It dominates the public sector, universities, non-governmental organisations and cultural and media industries and competes for political power against its enemies in "the merchant right", the rival faction that controls most of the business and finance sectors.
The Brahmin Left superficially resembles the 20th-century left: it advocates for the expansion of the state and uses the rhetoric of equality and social justice. But it enacts policies that maximise its own wealth and power, often at the expense of the disadvantaged groups it claims to represent.
So it's no accident, Piketty argues, that the 21st century has seen a surge of support for authoritarian regimes and ethnic nationalism. Nature abhors a vacuum and the failure of the modern left to present credible solutions to our challenges of the times, or to propose an inspirational vision of the future, has people casting about for alternatives.
Piketty's project is to lay the intellectual foundations of that vision. And he begins with the accumulation of data, and an inquiry into how our economy really works.
Following the money
In late April this year, just a few weeks before the Budget, David Parker delivered a speech at Victoria University of Wellington. It was titled "Shining a light on unfairness in our tax system". It cited Piketty and signalled a number of changes in tax policy.
Parker opened with a declaration that he had "no secret plan to introduce a CGT [capital gains tax] nor a wealth tax or a deemed income tax, nor others". This, of course, sparked intense speculation that he did, indeed, have a secret plan to introduce a CGT or a wealth tax. Left-wing commentators cheered him on; National and Act rushed out press releases and accused Prime Minister Jacinda Ardern of breaking a promise to the electorate.
Parker knew this would happen, and even predicted it in his speech. But the point he actually made that night is that, at present, we simply don't have enough information about the wealthiest members of our society and the tax they pay to make that call.
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Most of us make the bulk of our money from working, either for others or for ourselves, and hand over a chunk of that to the Inland Revenue Department (IRD). New Zealand is unusual in that, unlike most other OECD countries, it does not have a tax-free threshold. In Australia, you can earn $18,200 a year before you hit the first income tax bracket.
Most OECD countries also tax capital gains, which are the profits you make from an asset that has increased in value, such as a house or shares in a company. One of the reasons they do this is that capital gains often make up the bulk of rich people's incomes.
Although New Zealand has a de facto capital gains tax on some property transactions (the bright-line test), many other types of transactions remain opaque.
Parker finds this astonishing. "It beggars belief that we currently don't know what rate of tax is paid by the top cohort in New Zealand on their economic income," he tells the Listener.
He has told the IRD to find out, and clearly suspects that the concentration of wealth will be extreme. "It could be that more than two-thirds of all financial assets are held by the top 5 per cent, with most of that concentrated in the top few per cent."
Our odd tax system
The IRD has done some preliminary work on the assets of the very wealthy. In 2016, it conducted an internal study of 212 New Zealanders with assets of more than $50 million. These Kiwis had an average wealth of $270 million and an estimated wealth base of $58 billion.
The results of the study were partially released in 2018 when the lead investigator, Andrea Black, joined the Sir Michael Cullen-led Tax Working Group and requested her own report via the Official Information Act. It revealed that between them, the 212 people surveyed paid $658 million in tax during the year. This might sound like a lot, but relative to their incomes, it was astonishingly low.
About 40 per cent of the group paid less than 10 per cent tax on their overall incomes, which in percentage terms is lower than a worker on the minimum wage. The IRD estimated that about a third of their wealth had never had any tax paid on it.
How is that possible? It's hard to overemphasise how odd New Zealand's tax system is compared with most OECD nations'. Many of those in the top group examined by IRD made much of their income by buying and selling companies and properties. IRD also noted that between them, the group controlled more than 7000 companies or trusts of breathtaking complexity.
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The IRD also noted that many wealthy people established charitable organisations then made large tax-deductible donations to them. However, the charities themselves made few, if any, charitable disbursements. The government has since announced changes to charities laws requiring any charitable organisation with operating expenses above $140,000 to explain any major accumulated cash, assets and other resources.
Glenn Barclay, chair of lobby group Tax Justice Aotearoa, is delighted Parker is purssuing the issue. "It's shocking that we don't already have that information," he says.
Barclay believes the lack of transparency around wealth contributes to the lack of public outrage about New Zealand's highly unusual tax system. "Most people understand wealth as an aspect of income. They don't understand that, at the high end, it's about assets and that this is untaxed." He hopes the new information will increase transparency and help shift the narrative, "because we need to be taxing wealth. That's the big change that has to occur."
In 2014, the Serious Fraud Office compiled a draft report on economic crime, which estimated that tax fraud cost the country about $2 billion a year. By contrast, benefit fraud cost about $80 million. However, the report was never published, apparently because of concerns about its methodology. Meanwhile, Inland Revenue has stopped reporting "tax evasion". Instead, it now reports on "tax discrepancies" or "tax position differences". This was $854 million in 2021.
Tax Principles bill
Piketty wasn't the only economist referenced in Parker's April speech. He also quoted Adam Smith, the intellectual architect of modern capitalism.
In The Wealth of Nations, published in 1776, Smith laid out his four maxims of taxation – tax should be proportional, transparent, convenient and efficient – and these should aggregate into a progressive system in which the wealthy pay more than the poor.
"It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion," said Smith.
Smith's principles, or variations on them, have been ratified into law by many nations. But once again, New Zealand is an outlier.
Parker's solution is a new piece of legislation. The aim of his Tax Principles Bill, which is still being drafted and under consultation, is to enshrine some modern version of Smith's maxims into New Zealand law. Officials will then report on whether the tax system conforms to the principles.
Presumably, it would then be up to the government of the day to decide what to do about it. But reaction to Parker's speech shows the current government would be picking a huge fight on the right.
"If Labour is silly enough to add a new tax on savings to their election manifesto, the Taxpayers' Union will happily mobilise its 170,000 supporters to sink not just the tax, but the Labour-led government," the lobby group warned back in May.
Inheritance for all
Piketty's own programme of participatory socialism is far more radical than anything Labour or the Greens would whisper to each other in darkened corners, let alone announce as policy.
For Piketty, real social and economic change involves a dramatic transfer of power. Instead of a capital gains tax, he'd introduce a progressive wealth tax that would scale up to confiscatory levels for the very rich. Anyone wealthy enough to make the NBR Rich List or the IRD's survey of high-wealth individuals would lose the bulk of their fortune, which would be redistributed, primarily to those living in poverty.
The term Piketty uses is "equality of opportunity", which is a term popular on the political right. However, he has repurposed it to mean that children born into conditions of material poverty must grow up in warm, dry houses and have access to the same educational and employment opportunities as those born into families of the wealthy or middle class. He calls this redistributive plan "inheritance for all".
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Piketty is also a fan of what is known as Rhenish (or Rhine) capitalism, which has been associated with countries such as Austria, Germany and Switzerland. He would like to see employees of medium and large companies represented on the board of directors, and thus have some control over company decisions. He'd also introduce a system of egalitarian funding for political parties, think tanks and media organisations, so they aren't overly influenced by donations from the rich. And, since the most profound form of inequality is often that between nation states, he advocates the dismantling of the current global model and a transition towards a global republic, with vast wealth transfers from the wealthy regions to the poorest citizens of the world.
How realistic is any of this? Piketty acknowledges that transformation on such a scale would require "political movements of great scope", and that it's unlikely to happen via the normal incrementalism of modern democratic liberalism. But he also thinks that some form of transformational change is inevitable, because the current model of global hypercapitalism is unsustainable. Even now, he believes, it strains and shudders under its contradictions.
This prophecy might come true, eventually. Or it might not. For a few days after Parker's speech, there was a brief flurry of commentary and speculation about a wealth tax. The debate was shut down by Ardern. Although she admitted that the current tax system was unfair, she made it perfectly clear that she wasn't going to change it while she was in charge.
And in early July, the IRD reported that of the 376 wealthy people it contacted for its latest compulsory survey — this time of people it believes have assets worth more than $20 million — 14 of them had simply not replied.