There’s no consensus as to why economic inequality has increased. Some economists emphasize big rewards for workers with high skill levels (investment bankers, doctors, lawyers, business managers) and special talents (actors, athletes). Piketty argues that an American class of “supermanagers” (top corporate officials) has arisen, with their pay set artificially high by friendly compensation committees composed of other top corporate officers. The arrangement reeks of self-dealing, he says.
All income ultimately derives from either labor or capital. Labor includes wages, salaries and fringe benefits; capital covers the returns from stocks, bonds, real estate, businesses and other assets. Piketty fears that capital will gain relentlessly at the expense of labor. It’s simple arithmetic, he argues. Historical returns on capital, after inflation, have averaged 4 percent to 5 percent annually. Meanwhile, the world economy’s total income — slowed by small population and productivity gains — will grow only 1 percent to 3 percent annually, he believes. If capital income grows faster than total income, its share must increase.
Worse, he says, capital income is more concentrated than labor income. In the United States, the top 10 percent own about 70 percent of the capital, mainly stocks, bonds and real estate. To prevent inherited fortunes from dominating advanced societies, Piketty would raise the top income tax rate to roughly 80 percent on incomes above $500,000 or $1 million; he would also tax accumulated wealth.