Piketty Warns Scandinavia of Growing Income Inequality Risk

The Nordic nations, home to some of the world’s most egalitarian societies, should be concerned about growing rates of income inequality, according to Thomas Piketty.

“We don’t need to wait for the rise in inequality to be as large as in the U.S. to start worrying about it,” Piketty, author of the best-selling book ‘Capital in the Twenty-First Century’ and a professor at the Paris School of Economics, told reporters in Helsinki yesterday.

Sweden, Norway, Denmark and Finland have since World War II used income transfers to build welfare states intended to bridge the gap between rich and poor and increase social cohesion by providing free public services such as health care and education.

For the first time ever, the wealth gap grew more in the Nordic region and Germany than anywhere else in the “traditionally low-inequality countries” during first decade of the 21st century, the Organization for Economic Cooperation and Development said in a report in 2011. One reason is that the wages of the top 10 percent have been rising faster than pay for the middle class, according to the report.

Rising wealth inequality in the world “doesn’t have to be this way,” Piketty said. “We have to find a balance how much is taxed at the time of inheritance and how much is taxed during one’s lifetime on the basis of your property and your wealth.”

Widening Disparities

The 43-year-old professor examined centuries of data on countries including the U.S., Sweden, France and the U.K. for his book to show that returns on capital in excess of economic growth lead to widening disparities in wealth.

According to the OECD, the Nordic countries boast some of the highest levels of income equality among industrialized nations. Denmark and Norway rank in the top four of an OECD study of 34 nations, 2010 data from the Paris-based group show. The U.S. ranks fourth from the bottom. Only Turkey, Mexico and Chile have less equal income distributions than the world’s largest economy, according to the OECD. Iceland tops the list.

Tax Measures

Governments shouldn’t keep cutting corporate tax rates, as that fuels uneven shifts in wealth, Piketty said yesterday.

“If we stop taxing inherited wealth and corporate profits, we’ll have very high taxes on labor income, very high taxes on wages,” he said. “Inheritance tax is only one way to keep balance between capital and labor.” Other ways include levies on real estate, he said.

Swedes stopped paying inheritance tax in 2005, while Norwegians were taxed on inherited fortunes topping 470,000 kroner ($78,000) until the start of this year, when the due was abolished. Policy makers in Finland, which taxes legacies of 20,000 euros ($27,000) and more, are debating whether to eliminate the levy.

“Probably there is a temptation” in Finland to stop taxing inheritance to prevent people from shifting their wealth across borders, Piketty said. Still, “the complete suppression of inheritance tax is to me a big mistake.”

(An earlier version of this story corrected Norway’s inheritance tax status.)