I have complained about Dr Thomas Piketty’s Capital In The 21st Century and I still think it has been vastly overpraised, but I do not go along with every criticism others have made. As a matter of fact, I think one idea that has been roundly dismissed by fans and critics alike deserves to be taken more seriously: The proposal for a global wealth tax.

From the left, Dr James Galbraith of the University of Texas at Austin says the idea is futile: “Why spend an entire chapter on it — unless perhaps to incite the naive?” Mr Daniel Shuchman in The Wall Street Journal says it ignores the sources of prosperity: “He breezily assures us that none of this would reduce economic growth, productivity, entrepreneurship or innovation.” Mr Tim Worstall at Forbes says it is a logical impossibility. “Dr Piketty’s focus on soaking the rich smacks of socialist ideology, not scholarship,” says the economist.

Dr Piketty himself acknowledges that the tax is utopian and — as in the rest of the book — he spends no time interrogating his big conclusions or trying to improve them. But if you unpack the idea a little, it starts to look better. When it comes to feasibility, you might even claim that policy is moving this way.

TAXING CAPITAL INCOMES

On grounds of equity and efficiency, it makes sense to tax wealth. The practicalities, though, are daunting. Flight to low-tax jurisdictions — the rationale for making a wealth tax global — is only one of many difficulties. To levy a tax each year, you would need an annual accounting of wealth, which is not easy to do, and you would have to contend with the fact that wealth does not always produce a flow of income that can be used to pay what is owed.

The best way to tax wealth is, therefore, to tax capital income as it is realised and, once a lifetime, tax inheritance. The tax authorities generally pay lip service to this concept, but they execute it badly.

In the United States, capital gains are taxed when realised, though at a preferential rate. More importantly, as Mr Warren Buffett could tell you, investments can soar in value for decades without gains ever being realised or tax ever coming due. Incredibly, when those assets are passed to heirs, their value is rebased — and the unrealised gains simply disappear for capital-gains-tax purposes. True, the estate is then supposedly taxed in its own right, but the wealthy can find ways around that, too. The result is that enormous accumulations of income — that is, wealth — can escape tax altogether.

What is needed is moderate but effective taxation of capital income combined with moderate, but effective, taxation of inheritance, so that unrealised gains are brought back into the tax base, either during the course of an investor’s life or at death. In the case of the very rich, attuned as they are to tax-avoidance opportunities, effectiveness does require international cooperation. But here’s the thing: That part is already happening.

Bear in mind that the US taxes its citizens wherever they live and work in the world. In that sense, the US already collects a global income tax. In addition, in recent years, the US authorities have been waging war on foreign tax shelters and bank-secrecy laws. In some ways, this campaign has gone too far: The rules have become burdensome for ordinary taxpayers who have ever lived or worked abroad. (Many Americans complain that foreign banks and financial companies no longer want them as clients — too much record-keeping and reporting.) What’s interesting, though, is just how far foreign jurisdictions have gone in accommodating US demands for compliance with US standards.

Plutocrats are mobile and can live and work where they please. They can hire teams of lawyers to advise them on domicile, residence, citizenship and any of a thousand factors that will affect their tax liabilities.

Cooperation among the tax authorities in closing loopholes is, therefore, necessary. But it is happening and is likely to go further.

Dr Piketty’s nightmare of rule by oligarchs rests partly on his assumption that international tax competition will drive capital taxes to zero. In fact, greater cooperation among governments is already helping to ensure that the very rich pay their taxes. Combine this with reform at the national level to recapture unrealised capital gains for tax purposes and you could tax global wealth without ever needing a “global wealth tax”.

Not quite as momentous as Dr Piketty’s overblown central contradiction of capitalism — but on taxing wealth, he has a point. BLOOMBERG

ABOUT THE AUTHOR:

Clive Crook is a Bloomberg View columnist and a member of the Bloomberg View editorial board.