06/16/2014 04:23 pm ET Updated Aug 16, 2014

Reading Piketty in India

Daniel Berehulak via Getty Images

NEW DELHI -- Thomas Piketty has become the world's latest rock-star economist -- and ironically a very rich man -- by proposing a new global wealth tax on the world's rich.

That has electrified many liberals. "Today most countries tax the income produced by wealth -- dividends, rents, capital gains -- but they don't go after the wealth itself," Peter Coy wrote in his Bloomberg-Businessweek article, "An Immodest Proposal: A Global Tax on the Superrich."

Coy's joy is understandable. The West is struggling with how to rein in people such as Bill Gates, whose fortune mushrooms while the rest of us struggle to get by. The situation has become quite absurd with 85 of the world's richest people now having more money ($1.7 trillion) than the poorest 3.5 billion.

The gap is even more alarming in developing countries. In India, 800 million people live on less than $2 per person per day while the combined wealth of its 56 billionaires is now enough to end absolute poverty in the country twice over.

So Indians should love Piketty's wealth tax idea, right?

Wrong. Piketty's wealth tax is quite a joke here.

For one thing, Piketty's wealth tax idea really isn't his idea. Though Piketty presents his proposal for a global wealth tax as new and "utopian," the fact is that it is a tried, tested and almost universally hated idea.

India had a wealth tax of about 2 percent on its citizens' global assets through much of the 1970s and it worked beautifully to devastate its economy. Spain has a wealth tax of 2.5 percent even today and France also has a wealth tax, though it loftily calls it a "solidarity tax," as Coy himself notes.

Where Piketty is different is how high he wants his wealth tax to be and how low he sets the bar for people to be labeled "rich." His specific proposal is that anyone with assets of $300,000 and more should pay his new wealth tax, whose rate would vary on a sliding scale from 0.1 percent to 10 percent.

Now, $300,000 really isn't a lot of money these days, given it won't even pay for a doctor's degree at a private Indian medical college.

A wealth tax of 0.1 percent on $300,000 means a software engineer in Bangalore would pay $300 a year in Piketty's tax even if his salary is only $30,000. This is over and above the $10,000 he would pay in India as income tax.

A businessman in Moscow with about $1 million in assets but a $100,000 income would pay 1 percent, or $1000 a year, in Piketty's tax. Again, this is over and above the approximately $30,000 he would pay in income tax.

Similarly, a businessman in Brazil worth $100 million would find his Piketty tax to be 10 percent, or $10 million a year. That is probably more than he would make from his business or investments and so he would almost certainly have to liquidate part of his assets.

This is not just bad thinking. The Piketty tax is designed to deplete peoples' wealth.

Since Piketty admits in this book he has rarely travelled and knows little of the developing world, it is possible he is not aware that such wealth depleting taxes in India and elsewhere produced only one real outcome -- a rush to tax havens.

India today calculates that about $2 trillion of its national wealth sits in Swiss bank accounts. Not a day goes by without Indian politicians arguing about the best way to bring this money back home. But on one point everyone is agreed: much of this money migrated to the Alps during the draconian tax regimes of the 1970s.

Perhaps that's why Piketty has not really bothered to explain how his wealth tax could be ever be agreed upon, collected or spent. He has simply thrown a hand grenade into the room and left.

This is typical of those who condemn capitalism but cannot come up with palatable prescriptions to its problems. Being devoid of new ideas they simply dive deeper into old ones, like taxation.

But addressing inequality shouldn't be about penalizing the rich. It shouldn't be about reviving discredited socialist economic ideas from the 1970s in 21st century European think tanks. It should be about fixing the policies and practices that cause inequality.

While there is a natural propensity for capitalism to concentrate wealth, today's economic inequality is largely the result of three things.

In the U.S., inequality has spiked because of the U.S. Federal Reserve's Quantitative Easing (QE) program. This essentially allowed banks to create more than $2.5 trillion in cheap money. Instead of sharing this cheap money with the general population, banks are using it to enrich themselves.

While banks barely pay zero to 1 percent on QE money, they lend it to consumers at between 3 to 7 percent. Worse, they often do not lend QE funds to main street businesses and consumers at all and use the cheap money to buy up global stocks, real estate and other assets for themselves.

This is creating new bubbles in stock, real estate and other markets in India and elsewhere. The price of everything from art, to complicated watches, minerals, and esoteric items, such as stamp collections, are soaring.

Naturally, this only benefits the people who already own these assets or know how to trade on them. Ordinary people are not just bypassed, they are impoverished because that home or stock they were planning to buy keeps getting pricier and spiraling further out of reach.

Also fuelling inequality is governments' propensity to make policies that prioritize wealth creation over public interest. For example in countries such as China and India where hundreds of millions are homeless, land policies should be aimed at creating affordable housing. Instead, land is used as a financial asset and the government's main effort is to jack up its price.

Lastly, inequality is clearly the consequence of cronyism. In too many countries, policy and politicians have become captive to corporate czars and oligarchs. Consider how the U.S government decided to bail out banks holding bad mortgages rather than the citizens living in those mortgaged homes; or how Boeing and Lockheed Martin get multi-billion dollar space contracts without new players such as Elon Musk's SpaceX getting a chance to bid; or how telecom companies milk tiny but carefully inserted clauses in regulations; and how contractors cream billions out of road and construction all across the world.

Piketty's tax is fundamentally defeatist because it implicitly accepts there is no way to remedy any of this. It hits after all economic activity has occurred, i.e. after coal barons have taken over state mines and telecom czars have captured national spectrum. Hence, it fails to address the problems that distort economic activity and foster massive inequity in the first place.

Yet, this is the great political task of our time, the great test of democracy to deliver for the people. It is only when politics can defeat cronyism and corporatization that economic activity can possess a semblance of fairness, with everyone getting equality of opportunity (and reward) and real competitiveness ruling markets.

Experts have tabled a number of suggestions for accomplishing this. These include using legislation to curtail political funding by corporations and rich individuals and resisting further bailouts of companies over citizens. Other policies suggested include raising minimum wages, cutting tax deductions and addressing waste in government spending.

"Equity economists" also want to adopt "full cost" pricing, where all the public costs linked to a product are passed onto its producers and consumers. For example, the cost of protecting sea lanes and repairing the ecological damage caused by fossil fuels should be passed on to oil companies which in turn can pass it on to consumers.

Experts are also questioning the current money creation system, in which commercial banks possess the huge advantage of being in charge of creating money through credit. Many suggest a return to government money, akin to the "greenbacks" President Abraham Lincoln used to fund the civil war. They also want to shift the emphasis to local banking, which allows local communities and businesses easier access to credit.

In countries such as India, Russia and Brazil, government policies that directly transfer public wealth, including land, minerals and firms, to private individuals also need to end. For example, the old practice of (under)selling ailing but mammoth state enterprises to private industrialists must end. Instead, the shares of such companies can be sold in small lots only to first time shareholders. This will increase the number of shareholders in the country and spread equity culture in societies where a lot of people sew their money into their mattresses or buy unproductive assets like gold. It will also ensure privatized state-owned enterprises become genuinely public companies owned by a wide spectrum of citizens and not private corporations owned or controlled by billionaires.

Natural assets, such as mines and spectrum must also be sold transparently at market prices or traded through nationally created exchanges.

In place of high-impact taxes, such as Piketty's, which kill the very entrepreneurial zeal that creates the surpluses governments need, many economists prefer the introduction of high incidence, low impact taxes. For example, a financial transaction tax that would charge a small fee of about $1 per financial trade could alone raise $150 billion a year globally.

If these solutions actually appear politically feasible for the first time in years, it is because of the fallout of the long recession, anger over rising inequity and blatant cronyism have combined to create unprecedented public momentum for a new economic deal.

The world is at a historic crossroads, with new leaders in China, India and Brazil, as well as many U.S. presidential candidates, promising an end to cronyism. Even in Europe and Africa, voters are telling politicians business cannot continue as usual.

Proposals like Piketty's, which make no attempt to fix the system and merely seek to extract a toll from those who manipulate it, suck the energy out of this global movement to create a kinder, gentler capitalism.

Correction: An earlier version of this story incorrectly stated that a wealth tax of 0.1 percent on $300,000 means a software engineer in Bangalore would pay $3,000 a year in Piketty's tax. It is $300 a year. The version also incorrectly stated that a businessman with $1 million in assets but a $100,000 income would pay .5 percent, or $50,000 a year, in Piketty's tax. It is 1 percent, or $1,000 a year.