Thomas Piketty at the American University in Cairo (Photo: Ayman Hafez)
Egypt needs to introduce an inheritance tax and make fiscal data publicly available in order to adequately tackle social and economic inequality, world-renowned economist Thomas Piketty said in Cairo on Thursday.
Speaking at the launch of the first Arabic edition of his 2014 international best-seller, Capital in the Twenty First Century, translated by Egyptian economic journalists Wael Gamal and Salma Hussein, the French economist questioned the rationale of taxing consumption but not inherited wealth.
“It is a bit strange that you will tax consumption, so whoever wants to buy a coca cola in Egypt will pay a tax, but you can inherit millions and millions” without being liable for tax, he said.
Egypt is in the process of replacing an old haphazard sales tax system with a 10 percent value-added tax on a wide range of goods and services, a cornerstone in the strategy of Egypt's s government to reduce the budget deficit.
“I think it important that there exist an inheritance tax, if only as way to generate information about wealth,” said the economist in his characteristic provocative style.
In his book, Piketty calls for a global tax on wealth to stem the growing inequality of wealth, the product of an economy where the rate of return on capital is higher than the rate of growth, meaning that inherited wealth or self-accumulated wealth is growing faster than wealth earned through labour.
By wealth, Piketty means net-wealth (minus debt), in terms of the total value of assets owned such as real estate, financial assets, or financial debt.
Marshalling graph after graph and peppered with historical anecdotes, the award-winning French economist showed his Cairo audience in his presentation, as in his book, how major political shocks contributed to the reduction of inequality during most of the 20th century, notably two world wars, the Bolshevik revolution, and the Great Depression, and the rise of the welfare state of the post-war period. By contrast, he argues, wealth inequality has been on the rise since the 1970s and 80s.
In the United States, a dramatic rise in the top corporate incomes and managerial compensations in recent decades has created a society where wealth inequality is on track to return to an extreme not seen since before the First World War.
The hefty book (the English edition is almost 700 pages) has drawn praise for being firmly anchored in vast amounts of data.
Along with over thirty collaborators from 20 countries, Piketty spent fifteen years systematically collecting historical data on income and wealth covering two centuries of North American and European history.
“This is something which has never been done before largely because this historical data was too historical for economists and too economic for historians,” he explained to fans gathered at the old campus of the American University in Cairo, minutes away from Tahrir Square, the epicentre of the 2011 revolution.
"Troublesome" lack of transparency
One of the main limitations of the study, Piketty admits, is that it is centered on developments in the West.
“Unfortunately we know very little about income and wealth inequality within Egypt or within other Middle East countries, this is largely because we have no access to income tax or inheritance tax data, so it is impossible to make proper comparisons with other countries,” said the Paris School of Economics professor.
Official household survey data used by governments and international organisations to measure inequality in countries like Egypt greatly underestimates inequality, said the award-winning economist.
After Brazil made fiscal data available following the publication of Capital, said Piketty, the numbers told a very different story than official survey data about the trajectory of inequality in the country from in 2006, where the data started.
The lack of transparency about income and wealth in the Middle East and particularly in Egypt is “troublesome,” in that it allows for bad policy that fails to address inequality and basic needs, said the economist.
“If you don’t know enough about how income is distributed and who is benefiting from growth and who should benefit from social security, it makes it very difficult to have a peaceful discussion about these issues,” he said, stressing the need for societal dialogue about how public money is spent.
“It is important not to limit social policy to cash transfers,“ said Piketty in response to a question about Egypt from the audience, stressing the importance of access to services.
“Access to education and health are at least as important if not more important than cash transfers,” he said.
A staunch advocate of progressive taxation, Piketty said that Egypt’s income tax rate on the wealthiest (22.5 percent) was “very small compared to developed countries.”
Piketty cites the 80 to 90 percent tax imposed on top earners in the UK and the US in a high-growth post war period. “It did not kill capitalism, or growth,” he said.
“No country in the world has become rich with a small government,” said the economist who has since sparked a series of vehement rebuttals by conservative writers and critics.
Although bigger government is not always good, it can lead to great prosperity if it is transparent and efficient, he told the audience. “If small government was enough, Bulgaria and Romania would be richer than Denmark and Sweden,” he said.
“The myth of meritocracy”
“Sometimes the elites have a lot of imagination to justify inequality,” said the economist, stressing the need for data transparency to uncover economic and social realities.
In the summer of 1914, with war looking inevitable, France became the last of its peers to adopt a progressive income tax, long after Germany, Japan and Britain.
Part of the reason why France was so late, said Piketty, was because the French elite felt like the country had already become and egalitarian, meritocratic society in the century following the French Revolution, even though the concentration of wealth in France was nearly as high as that in Britain, which had adopted a progressive income tax in 1909.
To expose a more contemporary misconception, Piketty uses data from 2012-2013 to show a clear linear relationship between university attendance rates in the US and parental income.
Piketty’s graph shows children born to the poorest parents as having a 20 percent chance of attending university, while children of the wealthiest have roughly a 95 percent chance of entering into higher education, belying the official American discourse about a land of equal opportunity.
“Meritocracy is largely a myth invented by the winners of the system,” said the economist.
Though there is no mathematical formula to determine at what level wealth inequality starts to hamper economic growth, “certainly what we can learn from history is that the level of concentration of wealth in pretty much every European society up until World War I was not useful for growth,” said Piketty.
A complicating factor is that extreme inequality is self-sustaining, often leading to the persistence of inequality over time.
Politically, the danger with rising inequality and the accumulation of society’s wealth in the hands of a few is that threatens the very foundations of democracy, exacerbating social tensions and leading to the rise of radical nationalistic and xenophobic political movements, warns the author whose book has been read by millions across the world.
“If you don’t even manage to address inequality in a peaceful manner it’s always tempting for some political leaders to exploit inequality in order to raise anger against a particular population,” he said, citing the rise of the right-wing Front National party in France and the stridently anti-immigration presidential campaign of Donald Trump on the other side of the Atlantic.
But Piketty denies being a doomsday prophet.
“I am much more optimistic that some people imagine,” he said.
“Some people read my book and they think I am very pessimistic which is very sad because this is not the way I look at the future. I think that the right reforms can solve these problems.”