Which inequalities matter and which taxes are appropriate?


Crooked Timber is hosting a seminar on Thomas Piketty's Capital in the 21st Century. Kenneth Arrow on Piketty:

Professor Piketty and his colleagues at the Top Income Distribution Study have put us all in great debt for the great increase in our knowledge of historical development of inequalities in income and in wealth in a number of leading countries.

Notice I have already mentioned two inequalities, income and wealth. There is one more leading inequality which does not receive much attention in Piketty’s work: consumption. Papers and books have already appeared which try to measure this inequality. Many more inequalities, e.g. health, educational achievement, race, and gender differences have been the subject of study, but these are more specialized and less central to economic analysis.

There is a strong argument for emphasizing consumption. Why, after all, do we consider inequality in wealth, income, or consumption to be undesirable? If we consider only economic arguments, it is because the poor are being deprived of goods that are valuable to their lives, exactly because they are more basic than the desires of the rich.

This has important implications for how we evaluate Piketty’s arguments about inequality. It suggests an alternative metric of inequality, one under which some of the problems that Piketty identifies are not, in fact, problematic.

Consider a world, like that envisioned by Piketty, in which the rich consume relatively little (compared with their property income). They accumulate wealth by investing in industry, thereby increasing output in the future. If they do not consume more in the future, but instead, simply continue to accumulate, then the additional future output is available for the consumption of the poor.

More here.