Piketty Research

Prior to the war period, economic inequality has decreased, however in the past three decades, it has begun to rise and has yet to peak. French economist Thomas Piketty deduces that the cause lay partly in public policy choices made, including progressive income taxation, the taxation of inheritances, and the rise of the welfare state.

With regards to wealth inequality, Piketty heavily focuses his arguments on the tendency for the rate of return on capital to exceed the economy’s growth rate. He states that the bigger the gap between the average rate of return and the economy’s growth rate will lead to bigger inequality. All the English-speaking countries saw an increase in inequality beginning in the 1980s. However, Australia started out slightly more equal than the others, and the subsequent growth of inequality has been much less severe. According to Andrew Leigh’s graph between 1980 and 2000, inequality has raised by approximately 7% for Australia, 10% America, 8% for Britain. Therefore the implementation of appropriate policies controlling the return on capital and indirectly influencing inequality.

Furthermore, Picketty suggests a much greater role for taxation in redistributing income and wealth from those with the most to those with the least would generally decrease the increase in inequality. In the post war period Australia implemented a progressive tax system, allowing middle class and bottom groups to accumulate more wealth while lowering the incentive for wealthy people to earn additional income. However, the rise in the share of top-income recipients in total income is a sign that their capacity to pay tax increased and progressive tax reforms may thus be an effective tool. In particular, tax reforms that increase average tax rates without raising marginal rates could enable greater redistribution without undue blunting of incentives.

Thus, it is evident that Piketty’s arguments have been a fundamental factor affecting Australia’s changing inequality.

Economic inequality means unequal access to wealth and income. This brief mostly deals with income. In most developed countries, market income is mainly from wages and salaries, but also from returns on capital such as shares and rents. People's market income is then reduced by taxation and/or increased by government transfers such as pensions and child payments.