Capital in the Twenty-First Century (115 page)

32
. These rates applied in the direct line of inheritance. The rates applied to brothers,
sisters, cousins, and nonrelatives were sometimes higher in France and Germany. In
France today, for example, the rate for bequests to nonrelatives is 60 percent. But
rates never reached the 70–80 percent levels applied to children in the United States
and Britain.

33
. The record level of 98 percent was in force in Britain from 1941 to 1952 and again
from 1974 to 1978. See the online technical appendix for the complete series. During
the 1972 US presidential campaign, George McGovern, the Democratic candidate, went
so far as to propose a top rate of 100 percent for the largest inheritances (the rate
was then 77 percent) as part of his plan to introduce a guaranteed minimum income.
McGovern’s crushing defeat by Nixon marked the beginning of the end of the United
States’ enthusiasm for redistribution. See Beckert,
Inherited Wealth,
196.

34
. For example, when the top rate on capital income in Britain was 98 percent from
1974 to 1978, the top rate on labor income was 83 percent. See Supplemental Figure
S14.1, available online.

35
. British thinkers such as John Stuart Mill were already reflecting on inheritances
in the nineteenth century. The reflection intensified in the interwar years as more
sophisticated probate data became available. It continued after the war in the work
of James Meade and Anthony Atkinson, which I cited previously. It is also worth mentioning
that Nicholas Kaldor’s interesting proposal of a progressive tax on consumption (actually
on luxury consumption) was directly inspired by his desire to require more of idle
rentiers, whom he suspected of evading the progressive taxes on both estates and income
through the use of trust funds, unlike university professors such as himself, who
paid the income tax as required. See Nicholas Kaldor,
An Expenditure Tax
(London: Allen and Unwin, 1955).

36
. See Josiah Wedgwood,
The Economics of Inheritance
(Harmondsworth, England: Pelican Books, 1929; new ed. 1939). Wedgwood meticulously
analyzed the various forces at work. For example, he showed that charitable giving
was of little consequence. His analysis led him to the conclusion that only a tax
could achieve the equalization he desired. He also showed that French estates were
nearly as concentrated as British ones in 1910, from which he concluded that egalitarian
division of estates, as in France, though desirable, was clearly not enough to bring
about social equality.

37
. For France, I have included the generalized social contribution or CSG (currently
8 percent) in the income tax, which makes the current top rate 53 percent. See the
online technical appendix for the complete series.

38
. This is true not only of the United States and Britain (in the first group) and
Germany, France, and Japan (in the second group) but also for all of the eighteen
OECD countries for which we have data in the WTID that allow us to study the question.
See Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top
Labor Incomes: A Tale of Three Elasticities,”
American Economic Journal: Economic Policy,
forthcoming (fig. 3). See also the online technical appendix.

39
. See Piketty et al., “Optimal Taxation of Top Labor Incomes,” figs. 3 and A1 and
table 2. These results, which cover eighteen countries, are also available in the
online technical appendix. This conclusion does not depend on the choice of starting
and ending years. In all cases, there is no statistically significant relationship
between the decrease in the top marginal tax rate and the rate of growth. In particular,
starting in 1980 rather than 1960 or 1970 does not change the results. For growth
rates in the wealth countries over the period 1970–2010, see also
Table 5.1
here.

40
. We can rule out an elasticity of labor supply greater than 0.1–0.2 and justify the
optimal marginal income tax rate described below. All the details of the theoretical
argument and results are available in Piketty et al., “Optimal Taxation of Top Labor
Incomes,” and are summarized in the online technical appendix.

41
. It is important to average over fairly long periods (of at least ten to twenty years)
to have meaningful growth comparisons. Over shorter periods, growth rates vary for
all sorts of reasons, and it is impossible to draw any valid conclusions.

42
. The difference in per capita GDP stems from the fact that US citizens work more
hours than Europeans. According to standard international data, GDP per hour worked
is approximately the same in the United States as in the wealthiest countries of the
European continent (but significantly lower in Britain: see the online technical appendix).

43
. See in particular
Figure 2.3
.

44
. Per capita GDP in the United States grew at 2.3 percent a year from 1950 to 1970,
2.2 percent between 1970 and 1990, and 1.4 percent from 1990 to 2012. See
Figure 2.3
.

45
. The idea that the United States has innovated for the rest of the world was recently
proposed by Daron Acemoglu, James Robinson, and Thierry Verdier, “Can’t We All Be
More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World,”
(MIT Department of Economics Working Paper no. 12–22, August 20, 2012). This is an
essentially theoretical article, whose principal factual basis is that the number
of patents per capita is higher in the United States than in Europe. This is interesting,
but it seems to be at least partly a consequences of distinct legal practices, and
in any case it should allow the innovative country to retain significantly higher
productivity (or greater national income).

46
. See Piketty et al., “Optimal Taxation of Top Labor Incomes,” fig. 5, tables 3–4.
The results summarized here are based on detailed data concerning nearly three thousand
firms in fourteen countries.

47
. Xavier Gabaix and Augustin Landier argued that skyrocketing executive pay is a mechanical
consequence of increased firm size (which supposedly increases the productivity of
the most “talented” managers). See “Why Has CEO Pay Increased So Much?”
Quarterly Journal of Economics
123, no. 1 (2008): 49–100. The problem is that this theory is based entirely on the
marginal productivity model and cannot explain the large international variations
observed in the data (company size increased in similar proportions nearly everywhere,
but pay did not). The authors rely solely on US data, which unfortunately limits the
possibilities for empirical testing.

48
. Many economists defend the idea that greater competition can reduce inequality.
See, for example, Raghuram G. Rajan and Luigi Zingales,
Saving Capitalism from the Capitalists
(New York: Crown Business, 2003), and L. Zingales,
A Capitalism for the People
(New York: Basic Books, 2012), or Acemoglu, Robinson, and Verdier, “Can’t We All
Be More Like Scandinavians.” Some sociologists also take this line: see David B. Grusky,
“Forum: What to Do about Inequality?”
Boston Review,
March 21, 2012.

49
. Contrary to an idea that is often taught but rarely verified, there is no evidence
that executives in the period 1950–1980 made up for low pay with compensation in kind,
such as private planes, sumptuous offices, etc. On the contrary, all the evidence
suggests that such benefits in kind have increased since 1980.

50
. To be precise, 82 percent. See Piketty et al., “Optimal Taxation of Top Labor Incomes,”
table 5.

51
. Note that the progressive tax plays two very distinct roles in this theoretical
model (as well as in the history of progressive taxation): confiscatory rates (on
the order of 80–90 percent on the top 0.5 or 1 percent of the distribution) would
end indecent and useless compensation, while high but nonconfiscatory rates (of 50–60
percent on the top 5 or 10 percent) would raise revenues to finance the social state
above the revenues coming from the bottom 90 percent of the distribution.

52
. See Jacob Hacker and Paul Pierson,
Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned its Back
on the Middle Class
(New York: Simon and Schuster, 2010); K. Schlozman, Sidney Verba, and H. Brady,
The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American
Democracy
(Princeton: Princeton University Press, 2012); Timothy Noah,
The Great Divergence
(New York: Bloomsbury Press, 2012).

53
. See Claudia Goldin and Lawrence F. Katz,
The Race between Education and Technology: The Evolution of U.S. Educational Wage
Differentials, 1890–2005
(Cambridge, MA: Belknap Press and NBER, 2010), Rebecca M. Blank,
Changing Inequality
(Berkeley: University of California Press, 2011) and Raghuram G. Rajan,
Fault Lines
(Princeton: Princeton University Press, 2010).

54
. The pay of academic economists is driven up by the salaries offered in the private
sector, especially the financial sector, for similar skills. See
Chapter 8
.

55
. For example, by using abstruse theoretical models designed to prove that the richest
people should pay zero taxes or even receive subsidies. For a brief bibliography of
such models, see the online technical appendix.

1
. The additional revenue could be used to reduce existing taxes or to pay for additional
services (such as foreign aid or debt reduction; I will have more to say about this
later).

2
. Every continent has specialized financial institutions that act as central repositories
(custodian banks or clearing houses), whose purpose is to record ownership of various
types of assets. But the function of these private institutions is to provide a service
to the companies issuing the securities in question, not to record all the assets
owned by a particular individual. On these institutions, see Gabriel Zucman, “The
Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?”
Quarterly Journal of Economics
128, no. 3 (2013): 1321–64.

3
. For instance, the fall of the Roman Empire ended the imperial tax on land and therefore
the land titles and cadastre that went with it. According to Peter Temin, this contributed
to economic chaos in the early Middle Ages. See Peter Temin,
The Roman Market Economy
(Princeton: Princeton University Press, 2012), 149–51.

4
. For this reason, it would be useful to institute a low-rate tax on net corporate
capital together with a higher-rate tax on private wealth. Governments would then
be forced to set accounting standards, a task currently left to associations of private
accountants. On this subject, see Nicolas Véron, Matthieu Autrer, and Alfred Galichon,
L’information financière en crise: Comptabilité et capitalisme
(Paris: Odile Jacob, 2004).

5
. Concretely, the authorities do what is called a “hedonic” regression to calculate
the market price as a function of various characteristics of the property. Transactional
data are available in all developed countries for this purpose (and are used to calculate
real estate price indices).

6
. This temptation is a problem in all systems based on self-reporting by taxpayers,
such as the wealth tax system in France, where there is always an abnormally large
number of reports of wealth just slightly below the taxable threshold. There is clearly
a tendency to slightly understate the value of real estate, typically by 10 or 20
percent. A precomputed statement issued by the government would provide an objective
figure based on public data and a clear methodology and would thus put an end to such
behavior.

7
. Oddly enough, the French government once again turned to this archaic method in
2013 to obtain information about the assets of its own ministers, officially for the
purpose of restoring confidence after one of them was caught in a lie about evading
taxes on his wealth.

8
. For example, the Channel Islands, Liechtenstein, Monaco, etc.

9
. It is difficult to estimate the extent of such losses, but in a country like Luxembourg
or Switzerland they might amount to as much as 10–20 percent of national income, which
would have a substantial impact on their standard of living. (The same is true of
a financial enclave like the City of London.) In the more exotic tax havens and microstates,
the loss might be as high as 50 percent or more of national income, indeed as high
as 80–90 percent in territories that function solely as domiciles for fictitious corporations.

10
. Social insurance contributions are a type of income tax (and are included in the
income tax in some countries; see
Chapter 13
).

11
. See in particular
Table 12.1
.

12
. Recall the classic definition of income in the economic sense, given by the British
economist John Hicks: “The income of a person or collectivity is the value of the
maximum that could be consumed during the period while remaining as wealthy at the
end of the period as at the beginning.”

13
. Even with a return on capital of 2 percent (much lower than the actual return on
the Bettencourt fortune in the period 1987–2013), the economic income on 30 billion
euros would amount to 600 million euros, not 5 million.

14
. In the case of the Bettencourt fortune, the largest in France, there was an additional
problem: the family trust was managed by the wife of the minister of the budget, who
was also the treasurer of a political party that had received large donations from
Bettencourt. Since the same party had reduced the wealth tax by two-thirds during
its time in power, the story naturally stirred up a considerable reaction in France.
The United States is not the only country where the wealthy wield considerable political
influence, as I showed in the previous chapter. Note, too, that the minister of the
budget in question was succeeded by another who had to resign when it was revealed
that he had a secret bank account in Switzerland. In France, too, the political influence
of the wealthy transcends political boundaries.