The dependence of the return on capital on the amount of capital
The reason why the rich are getting richer than the rest of the world
I recently commented on an article by Umair Haque. In my comment, I briefly explained why the rich are getting richer. This was my most successful comment to date with 112 claps. Afterwards I did some further research and realized that my reasoning contains only half the truth.
What is correct is that interest (r) on capital has historically almost always been higher than the growth rate (g) of the economy and population. Also true is that debt makes it easier for the rich to raise the rate of interest (r), while this is not true for the middle class and the poor.
But an equally significant effect is that the larger the capital stock, the higher the average interest rate. This means that someone with a capital stock of, say, 1 million euros will achieve an average return of 5–8% on their capital, while wealthy people with 100 million euros will achieve an average return of 10%. This effect accelerates the accumulation of capital and creates an even more significant gap between rich and poor. It also does not seem to make a difference whether I have achieved this money as a self-made millionaire or whether I am an heir to large fortunes. Above a certain level of wealth, there are investment opportunities that provide significantly higher returns. This is most likely why we have seen and continue to see such a rapid increase in billionaires in recent years. Their capital is multiplying at a faster rate.
Since the data on the richest people is not very transparent, you can also see this by looking at the trust funds of American universities.
Average real rate of return per year (after deduction of administrative costs and adjusted for inflation)
One way that Piketty suggests to stop the divergence of wealth would be to introduce a progressive capital gains tax. Germany and many other countries only have a progressive income tax. That is, for very little capital, the tax should be 0 or very low, while for very large assets, the tax burden should be greater. In this way, an equalization of capital returns could be brought about through taxes. The positive advantage of this would be that, with respect to billionaires, there would no longer be an increased reliance on their donations and investments, and thus a broader mass could benefit. Due to the ratio r > g, it would even have made more sense to introduce a progressive capital gains tax than a progressive income tax as it was introduced in the 20th century. Admittedly, his is very simplistic thinking, partly because in the 21st century we increasingly see super-managers with salaries in the millions. But fundamentally, the progressive capital gains tax would be a more purposeful tool.
One problem with the money printing orgies, and especially those of recent years, is that the money is not distributed evenly. This effect is also called the Cantillon effect. That is, banks and state-affiliated companies benefit more from the printed money, while the middle class and the citizens of a country benefit less. This further increases inequality. Again, a corresponding progressive capital tax could counteract this.
Another nice side effect of the progressive capital gains tax would be that it would lead to more transparency. Provided it would be applied across the board and would also apply to profits earned abroad. However, therein lies the main difficulty. Until now, states have competed for the capital of the rich. In other words, capital is invested or parked in countries where the tax burden is lowest or where there are tax-saving schemes that favor capital assets. This now results in a regressive tax burden for the super-rich, even in industrialized countries such as France or Germany.
To counteract this and seriously combat inequality, the countries of the world would have to work together and not compete with each other as to who offers the best tax framework for the rich. This is also countered by the fact that many politicians are now very rich themselves or their spouses are, so that they would harm themselves. Or that the influence exerted by lobbyists is very great, which in turn leads to corresponding reforms not being implemented.
The bottom line is that such a system of state coexistence must be introduced in order to reduce the worldwide gap or to prevent social unrest.
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Disclaimer: The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial, legal or tax advice. The content of this text is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. The author does not guarantee any particular outcome.
