Capital in the Twenty-First Century (87 page)

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In France, the 1914 income tax law provided for a top rate of just 2 percent, which
applied to only a tiny minority of taxpayers. It was only after the war, in a radically
different political and financial context, that the top rate was raised to “modern”
levels: 50 percent in 1920, then 60 percent in 1924, and even 72 percent in 1925.
Particularly striking is the fact that the crucial law of June 25, 1920, which raised
the top rate to 50 percent and can actually be seen as a second coming of the income
tax, was adopted by the so-called blue-sky Chamber (one of the most right-wing Chambers
of Deputies in the history of the French Republic) with its “National Bloc” majority,
made up largely of the very delegations who had most vehemently opposed the creation
of an income tax with a top rate of 2 percent before the war. This complete reversal
of the right-wing position on progressive taxation was of course due to the disastrous
financial situation created by the war. During the conflict the government had run
up considerable debts, and despite the ritual speeches in which politician after politician
declared that “Germany will pay,” everyone knew that new fiscal resources would have
to be found. Postwar shortages and the recourse to the printing press had driven inflation
to previously unknown heights, so that the purchasing power of workers remained below
1914 levels, and several waves of strikes in May and June of 1919 threatened the country
with paralysis. In such circumstances, political proclivities hardly mattered: new
sources of revenue were essential, and no one believed that those with the highest
incomes ought to be spared. The Bolshevik Revolution of 1917 was fresh in everyone’s
mind. It was in this chaotic and explosive situation that the modern progressive income
tax was born.
¹⁵

The German case is particularly interesting, because Germany had had a progressive
income tax for more than twenty years before the war. Throughout that period of peace,
tax rates were never raised significantly. In Prussia, the top rate remained stable
at 3 percent from 1891 to 1914 and then rose to 4 percent from 1915 to 1918, before
ultimately shooting up to 40 percent in 1919–1920, in a radically changed political
climate. In the United States, which was intellectually and politically more prepared
than any other country to accept a steeply progressive income tax and would lead the
movement in the interwar period, it was again not until 1918–1919 that the top rate
was abruptly increased, first to 67 and then to 77 percent. In Britain, the top rate
was set at 8 percent in 1909, a fairly high level for the time, but again it was not
until after the war that it was suddenly raised to more than 40 percent.

Of course it is impossible to say what would have happened had it not been for the
shock of 1914–1918. A movement had clearly been launched. Nevertheless, it seems certain
that had that shock not occurred, the move toward a more progressive tax system would
at the very least have been much slower, and top rates might never have risen as high
as they did. The rates in force before 1914, which were always below 10 percent (and
generally below 5), including the top rates, were not very different from tax rates
in the eighteenth and nineteenth centuries. Even though the progressive tax on total
income was a creation of the late nineteenth and early twentieth centuries, there
were much earlier forms of income tax, generally with different rules for different
types of income, and usually with flat or nearly flat rates (for example, a flat rate
after allowing for a certain fixed deduction). In most cases the rates were 5–10 percent
(at most). For example, this was true of the categorical or schedular tax, which applied
separate rates to each category (or schedule) of income (land rents, interest, profits,
wages, etc.). Britain adopted such a categorical tax in 1842, and it remained the
British version of the income tax until the creation in 1909 of a “supertax” (a progressive
tax on total income).
¹⁶

In Ancien Régime France, there were also various forms of direct taxation of incomes,
such as the
taille,
the
dixième,
and the
vingtième,
with typical rates of 5 or 10 percent (as the names indicate) applied to some but
not all sources of income, with numerous exemptions. In 1707, Vauban proposed a “dixième
royal,” which was intended to be a 10 percent tax on all incomes (including rents
paid to aristocratic and ecclesiastical landlords), but it was never fully implemented.
Various improvements to the tax system were nevertheless attempted over the course
of the eighteenth century.
¹⁷
Revolutionary lawmakers, hostile to the inquisitorial methods of the fallen monarchy
and probably keen as well to protect the emerging industrial bourgeoisie from bearing
too heavy a tax burden, chose to institute an “indicial” tax system: taxes were calculated
on the basis of indices that were supposed to reflect the taxpayer’s ability to pay
rather than actual income, which did not have to be declared. For instance, the “door
and window tax” was based on the number of doors and windows in the taxpayer’s primary
residence, which was taken to be an index of wealth. Taxpayers liked this system because
the authorities could determine how much tax they owed without having to enter their
homes, much less examine their account books. The most important tax under the new
system created in 1792, the property tax, was based on the rental value of all real
estate owned by the taxpayer.
¹⁸
The income tax was based on estimates of average rental value, which were revised
once a decade when the tax authorities inventoried all property in France; taxpayers
were not required to declare their actual income. Since inflation was slow, this made
little difference. In practice, this real estate tax amounted to a flat tax on rents
and was not very different from the British categorical tax. (The effective rate varied
from time to time and
département
to
département
but never exceeded 10 percent.)

To round out the system, the nascent Third Republic decided in 1872 to impose a tax
on income from financial assets. This was a flat tax on interest, dividends, and other
financial revenues, which were rapidly proliferating in France at the time but almost
totally exempt from taxation, even though similar revenues were taxed in Britain.
Once again, however, the tax rate was set quite low (3 percent from 1872 to 1890 and
then 4 percent from 1890 to 1914), at any rate in comparison with the rates assessed
after 1920. Until World War I, it seems to have been the case in all the developed
countries that a tax on income was not considered “reasonable” unless the rate was
under 10 percent, no matter how high the taxable income.

Interestingly, this was also true of the progressive inheritance or estate tax, which,
along with the progressive income tax, was the second important fiscal innovation
of the early twentieth century. Estate tax rates also remained quite low until 1914
(see
Figure 14.2
). Once again, the case of France under the Third Republic is emblematic: here was
a country that was supposed to nurse a veritable passion for the ideal of equality,
in which universal male suffrage was reestablished in 1871, and which nevertheless
stubbornly refused for nearly half a century to fully embrace the principle of progressive
taxation. Attitudes did not really change until World War I made change inevitable.
To be sure, the estate tax instituted by the French Revolution, which remained strictly
proportional from 1791 to 1901, was made progressive by the law of February 25, 1901.
In reality, however, not much changed: the highest rate was set at 5 percent from
1902 to 1910 and then at 6.5 percent from 1911 to 1914 and applied to only a few dozen
fortunes every year. In the eyes of wealthy taxpayers, such rates seemed exorbitant.
Many felt that it was a “sacred duty” to ensure that “a son would succeed his father,”
thereby perpetuating the family property, and that such straightforward perpetuation
should not incur a tax of any kind.
¹⁹
In reality, however, the low inheritance tax did not prevent estates from being passed
on largely intact from one generation to the next. The effective average rate on the
top centile of inheritances was no more than 3 percent after the reform of 1901 (compared
to 1 percent under the proportional regime in force in the nineteenth century). In
hindsight, it is clear that the reform had scarcely any impact on the process of accumulation
and hyperconcentration of wealth that was under way at the time, regardless of what
contemporaries may have believed.

It is striking, moreover, how frequently opponents of progressive taxation, who were
clearly in the majority among the economic and financial elite of Belle Époque France,
rather hypocritically relied on the argument that France, being a naturally egalitarian
country, had no need of progressive taxes. A typical and particularly instructive
example is that of Paul Leroy-Beaulieu, one of the most influential economists of
the day, who in 1881 published his famous
Essai sur la répartition des richesses et sur la tendance à une moindre inégalité
des conditions
(Essay on the Distribution of Wealth and the Tendency toward Reduced Inequality of
Conditions), a work that went through numerous editions up to the eve of World War
I.
²⁰
Leroy-Beaulieu actually had no data of any kind to justify his belief in a “tendency
toward a reduced inequality of conditions.” But never mind that: he managed to come
up with dubious and not very convincing arguments based on totally irrelevant statistics
to show that income inequality was decreasing.
²¹
At times he seemed to notice that his argument was flawed, and he then simply stated
that reduced inequality was just around the corner and that in any case nothing of
any kind must be done to interfere with the miraculous process of commercial and financial
globalization, which allowed French savers to invest in the Panama and Suez canals
and would soon extend to czarist Russia. Clearly, Leroy-Beaulieu was fascinated by
the globalization of his day and scared stiff by the thought that a sudden revolution
might put it all in jeopardy.
²²
There is of course nothing inherently reprehensible about such a fascination as long
as it does not stand in the way of sober analysis. The great issue in France in 1900–1910
was not the imminence of a Bolshevik revolution (which was no more likely than a revolution
is today) but the advent of progressive taxation. For Leroy-Beaulieu and his colleagues
of the “center right” (in contrast to the monarchist right), there was one unanswerable
argument to progressivity, which right-thinking people should oppose tooth and nail:
France, he maintained, became an egalitarian country thanks to the French Revolution,
which redistributed the land (up to a point) and above all established equality before
the law with the Civil Code, which instituted equal property rights and the right
of free contract. Hence there was no need for a progressive and confiscatory tax.
Of course, he added, such a tax might well be useful in a class-ridden aristocratic
society like that of Britain, across the English Channel, but not in France.
²³

FIGURE 14.2.
   Top inheritance tax rates, 1900–2013

The top marginal tax rate of the inheritance tax (applying to the highest inheritances)
in the United States dropped from 70 percent in 1980 to 35 percent in 2013.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

As it happens, if Leroy-Beaulieu had bothered to consult the probate records published
by the tax authorities shortly after the reform of 1901, he would have discovered
that wealth was nearly as concentrated in republican France during the Belle Époque
as it was in monarchical Britain. In parliamentary debate in 1907 and 1908, proponents
of the income tax frequently referred to these statistics.
²⁴
This interesting example shows that even a tax with low rates can be a source of
knowledge and a force for democratic transparency.

In other countries the estate tax was also transformed after World War I. In Germany,
the idea of imposing a small tax on the very largest estates was extensively discussed
in parliamentary debate at the end of the nineteenth century and beginning of the
twentieth. Leaders of the Social Democratic Party, starting with August Bebel and
Eduard Bernstein, pointed out that an estate tax would make it possible to decrease
the heavy burden of indirect taxes on workers, who would then be able to improve their
lot. But the Reichstag could not agree on a new tax: the reforms of 1906 and 1909
did institute a very small estate tax, but bequests to a spouse or children (that
is, the vast majority of estates) were entirely exempt, no matter how large. It was
not until 1919 that the German estate tax was extend to family bequests, and the top
rate (on the largest estates) was abruptly increased from 0 to 35 percent.
²⁵
The role of the war and of the political changes it induced seems to have been absolutely
crucial: it is hard to see how the stalemate of 1906–1909 would have been overcome
otherwise.
²⁶