Split By Decision

Those who succeed on this new global stage are rewarded today like never before. Zhang Yin, who founded Nine Dragons Paper in 1995, has turned a small scrap-paper operation into a multibillion-dollar fortune, becoming the richest woman in China in less than a dozen years. Reliance Industries, the Indian petrochemical giant controlled by Mukesh Ambani, has a cash hoard of $28 billion. "I do think that the ability to operate at scale, whether it's an individual star or companies that have a global reach, is part of the inequality story," says Jeffrey Sachs, director of Columbia University's Earth Institute. The piling up of immense fortunes in still-poor countries shows that what Cornell economist Robert Frank has dubbed the "winner-take-all society" has gone global. "The kinds of forces that create winner-take-all markets have just gotten stronger very quickly in the last 30 years" due to globalization, he says.

But globalization isn't the only factor at work. The rising tide may be lifting the yachts disproportionately, and the wind may be filling their sails. But the big ships are also being propelled by powerful motors in the form of policymakers. When it comes to issues like free trade, the taxation of wealth, the protection of workers and the necessity of redistribution and social welfare, the center has moved to the right —in the United States and globally. "The contours of the debate have changed significantly, and they all revolve around working with markets rather than against the markets," said Dani Rodrik, professor of international political economy at Harvard and author of "One Economics, Many Recipes: Globalization, Institutions, and Economic Growth."

Rodrik and several other scholars suggest that changing laws, norms and institutions have played an important role in spurring inequality. "It's clear that institutions governing CEO pay and stock options matter a great deal," says Piketty. Consider that in the United States in 2005, the average compensation of the chief executive officer of an S&P 500 company was 411 times that of the average worker, up from 107 times in 1990.

Historically, progressive-tax and social-welfare policies have helped to mitigate such inequality, acting as shock absorbers. But in this decade, such policies have acted as an accelerant. "Rather than using the tools that we have to counteract the forces, moneyed interests really grabbed U.S. politics in the last 20 years and exacerbated these trends," says Sachs. "And so the tax structure became less fair, and the public-expenditure side became even less fair." In the past several years, the Bush administration and the Republican Congress slashed marginal income-tax rates sharply and cut taxes on capital gains, dividends and estates—all of which have massively benefited the already wealthy. Observers were surprised—but hardly shocked—to learn that a loophole allows hedge-fund and private-equity managers to pay a 15 percent capital-gains tax rate on the so-called carried interest, the fees they earn for managing other people's money.

Elsewhere, tax regimes are similarly friendly to concentrations of wealth. India has a progressive-tax system: 30 percent on incomes between about $6,250 to $25,000, with a 10 percent surcharge on amounts above $25,000. But only a small portion of the population files annual returns, and the country has few strong measures to punish tax evaders. On paper, China's income-tax rates are fairly high by Asian standards, and progressive. But the Chinese pay a staggering number of fees—charges tacked on to the price of goods and services—that are regressive. In addition, income-tax evasion in China occurs on a massive scale, while China's 20 percent capital-gains tax and dividends tax are only selectively enforced.

Wealth begets wealth, which underscores the role that the loosening of restrictions on international capital flows has played in increasing inequity. As the IMF recently noted, free trade (the most frequently cited cause of inequality) has, without question, decreased the rich-poor divide at a global level. Unrestricted global capital flows, on the other hand, have increased it, both by boosting the fortunes of individuals invested in global markets and by increasing the pace at which globalization and technological change (which often displaces lower-paid workers) can happen. "The rise in asset prices and asset returns is an economic force that pushes the world of increasing inequality," says Piketty. Bruce Holley, a partner in the New York office of the Boston Consulting Group, notes that the concentration of wealth is heightened in part because wealthy people are earning more from their jobs and more from their investments. "The higher you go up the asset scale, the faster the rate at which it grows," he said. "Wealthy people today have access to asset classes like hedge funds and private-equity funds that can generate higher returns."