Capital in the Twenty-First Century (90 page)

To reject the global tax on capital out of hand would be all the more regrettable
because it is perfectly possible to move toward this ideal solution step by step,
first at the continental or regional level and then by arranging for closer cooperation
among regions. One can see a model for this sort of approach in the recent discussions
on automatic sharing of bank data between the United States and the European Union.
Furthermore, various forms of capital taxation already exist in most countries, especially
in North America and Europe, and these could obviously serve as starting points. The
capital controls that exist in China and other emerging countries also hold useful
lessons for all. There are nevertheless important differences between these existing
measures and the ideal tax on capital.

First, the proposals for automatic sharing of banking information currently under
discussion are far from comprehensive. Not all asset types are included, and the penalties
envisioned are clearly insufficient to achieve the desired results (despite new US
banking regulations that are more ambitious than any that exist in Europe). The debate
is only beginning, and it is unlikely to produce tangible results unless relatively
heavy sanctions are imposed on banks and, even more, on countries that thrive on financial
opacity.

The issue of financial transparency and information sharing is closely related to
the ideal tax on capital. Without a clear idea of what all the information is to be
used for, current data-sharing proposals are unlikely to achieve the desired result.
To my mind, the objective ought to be a progressive annual tax on individual wealth—that
is, on the net value of assets each person controls. For the wealthiest people on
the planet, the tax would thus be based on individual net worth—the kinds of numbers
published by
Forbes
and other magazines. (And collecting such a tax would tell us whether the numbers
published in the magazines are anywhere near correct.) For the rest of us, taxable
wealth would be determined by the market value of all financial assets (including
bank deposits, stocks, bonds, partnerships, and other forms of participation in listed
and unlisted firms) and nonfinancial assets (especially real estate), net of debt.
So much for the basis of the tax. At what rate would it be levied? One might imagine
a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 and
5 million, and 2 percent above 5 million. Or one might prefer a much more steeply
progressive tax on the largest fortunes (for example, a rate of 5 or 10 percent on
assets above 1 billion euros). There might also be advantages to having a minimal
rate on modest-to-average wealth (for example, 0.1 percent below 200,000 euros and
0.5 percent between 200,000 and 1 million).

I discuss these issues later on. Here, the important point to keep in mind is that
the capital tax I am proposing is a progressive annual tax on global wealth. The largest
fortunes are to be taxed more heavily, and all types of assets are to be included:
real estate, financial assets, and business assets—no exceptions. This is one clear
difference between my proposed capital tax and the taxes on capital that currently
exist in one country or another, even though important aspects of those existing taxes
should be retained. To begin with, nearly every country taxes real estate: the English-speaking
countries have “property taxes,” while France has a
taxe foncière.
One drawback of these taxes is that they are based solely on real property. (Financial
assets are ignored, and property is taxed at its market value regardless of debt,
so that a heavily indebted person is taxed in the same way as a person with no debt.)
Furthermore, real estate is generally taxed at a flat rate, or close to it. Still,
such taxes exist and generate significant revenue in most developed countries, especially
in the English-speaking world (typically 1–2 percent of national income). Furthermore,
property taxes in some countries (such as the United States) rely on fairly sophisticated
assessment procedures with automatic adjustment to changing market values, procedures
that ought to be generalized and extended to other asset classes. In some European
countries (including France, Switzerland, Spain, and until recently Germany and Sweden),
there are also progressive taxes on total wealth. Superficially, these taxes are closer
in spirit to the ideal capital tax I am proposing. In practice, however, they are
often riddled with exemptions. Many asset classes are left out, while others are assessed
at arbitrary values having nothing to do with their market value. That is why several
countries have moved to eliminate such taxes. it is important to heed the lessons
of these various experiences in order to design an appropriate capital tax for the
century ahead.

What tax schedule is ideal for my proposed capital tax, and what revenues should we
expect such a tax to produce? Before I attempt to answer these questions, note that
the proposed tax is in no way intended to replace all existing taxes. It would never
be more than a fairly modest supplement to the other revenue streams on which the
modern social state depends: a few points of national income (three or four at most—still
nothing to sneeze at).
¹
The primary purpose of the capital tax is not to finance the social state but to
regulate capitalism. The goal is first to stop the indefinite increase of inequality
of wealth, and second to impose effective regulation on the financial and banking
system in order to avoid crises. To achieve these two ends, the capital tax must first
promote democratic and financial transparency: there should be clarity about who owns
what assets around the world.

Why is the goal of transparency so important? Imagine a very low global tax on capital,
say a flat rate of 0.1 percent a year on all assets. The revenue from such a tax would
of course be limited, by design: if the global stock of private capital is about five
years of global income, the tax would generate revenue equal to 0.5 percent of global
income, with minor variations from country to country according to their capital/income
ratio (assuming that the tax is collected in the country where the owner of the asset
resides and not where the asset itself is located—an assumption that can by no means
be taken for granted). Even so, such a limited tax would already play a very useful
role.

First, it would generate information about the distribution of wealth. National governments,
international organizations, and statistical offices around the world would at last
be able to produce reliable data about the evolution of global wealth. Citizens would
no longer be forced to rely on
Forbes,
glossy financial reports from global wealth managers, and other unofficial sources
to fill the official statistical void. (Recall that I explored the deficiencies of
those unofficial sources in
Part Three
.) Instead, they would have access to public data based on clearly prescribed methods
and information provided under penalty of law. The benefit to democracy would be considerable:
it is very difficult to have a rational debate about the great challenges facing the
world today—the future of the social state, the cost of the transition to new sources
of energy, state-building in the developing world, and so on—because the global distribution
of wealth remains so opaque. Some people think that the world’s billionaires have
so much money that it would be enough to tax them at a low rate to solve all the world’s
problems. Others believe that there are so few billionaires that nothing much would
come of taxing them more heavily. As we saw in
Part Three
, the truth lies somewhere between these two extremes. In macroeconomic terms, one
probably has to descend a bit in the wealth hierarchy (to fortunes of 10–100 million
euros rather than 1 billion) to obtain a tax basis large enough to make a difference.
I have also discovered some objectively disturbing trends: without a global tax on
capital or some similar policy, there is a substantial risk that the top centile’s
share of global wealth will continue to grow indefinitely—and this should worry everyone.
In any case, truly democratic debate cannot proceed without reliable statistics.

The stakes for financial regulation are also considerable. The international organizations
currently responsible for overseeing and regulating the global financial system, starting
with the IMF, have only a very rough idea of the global distribution of financial
assets, and in particular of the amount of assets hidden in tax havens. As I have
shown, the planet’s financial accounts are not in balance. (Earth seems to be perpetually
indebted to Mars.) Navigating our way through a global financial crisis blanketed
in such a thick statistical fog is fraught with peril. Take, for example, the Cypriot
banking crisis of 2013. Neither the European authorities nor the IMF had much information
about who exactly owned the financial assets deposited in Cyprus or what amounts they
owned, hence their proposed solutions proved crude and ineffective. As we will see
in the next chapter, greater financial transparency would not only lay the groundwork
for a permanent annual tax on capital; it would also pave the way to a more just and
efficient management of banking crises like the one in Cyprus, possibly by way of
carefully calibrated and progressive special levies on capital.

An 0.1 percent tax on capital would be more in the nature of a compulsory reporting
law than a true tax. Everyone would be required to report ownership of capital assets
to the world’s financial authorities in order to be recognized as the legal owner,
with all the advantages and disadvantages thereof. As noted, this was what the French
Revolution accomplished with its compulsory reporting and cadastral surveys. The capital
tax would be a sort of cadastral financial survey of the entire world, and nothing
like it currently exists.
²
It is important to understand that a tax is always more than just a tax: it is also
a way of defining norms and categories and imposing a legal framework on economic
activity. This has always been the case, especially in regard to land ownership.
³
In the modern era, the imposition of new taxes around the time of World War I required
precise definitions of income, wages, and profits. This fiscal innovation in turn
fostered the development of accounting standards, which had not previously existed.
One of the main goals of a tax on capital would thus be to refine the definitions
of various asset types and set rules for valuing assets, liabilities, and net wealth.
Under the private accounting standards now in force, prescribed procedures are imperfect
and often vague. These flaws have contributed to the many financial scandals the world
has seen since 2000.
⁴

Last but not least, a capital tax would force governments to clarify and broaden international
agreements concerning the automatic sharing of banking data. The principle is quite
simple: national tax authorities should receive all the information they need to calculate
the net wealth of every citizen. Indeed, the capital tax should work in the same way
as the income tax currently does in many countries, where data on income are provided
to the tax authorities by employers (via the W-2 and 1099 forms in the United States,
for example). There should be similar reporting on capital assets (indeed, income
and capital reporting could be combined into one form). All taxpayers would receive
a form listing their assets and liabilities as reported to the tax authorities. Many
US states use this method to administer the property tax: taxpayers receive an annual
form indicating the current market value of any real estate they own, as calculated
by the government on the basis of observed prices in transactions involving comparable
properties. Taxpayers can of course challenge these valuations with appropriate evidence.
In practice, corrections are rare, because data on real estate transactions are readily
available and hard to contest: nearly everyone is aware of changing real estate values
in the local market, and the authorities have comprehensive databases at their disposal.
⁵
Note, in passing, that this reporting method has two advantages: it makes the taxpayer’s
life simple and eliminates the inevitable temptation to slightly underestimate the
value of one’s own property.
⁶

It is essential—and perfectly feasible—to extend this reporting system to all types
of financial assets (and debts). For assets and liabilities associated with financial
institutions within national borders, this could be done immediately, since banks,
insurance companies, and other financial intermediaries in most developed countries
are already required to inform the tax authorities about bank accounts and other assets
they administer. In France, for example, the government knows that Monsieur X owns
an apartment worth 400,000 euros and a stock portfolio worth 200,000 euros and has
100,000 euros in outstanding debts. It could thus send him a form indicating these
various amounts (along with his net worth of 500,000 euros) with a request for corrections
and additions if appropriate. This type of automated system, applied to the entire
population, is far better adapted to the twenty-first century than the archaic method
of asking all persons to declare honestly how much they own.
⁷

The first step toward a global tax on capital should be to extend to the international
level this type of automatic transmission of banking data in order to include information
on assets held in foreign banks in the precomputed asset statements issued to each
taxpayer. It is important to recognize that there is no technical obstacle to doing
so. Banking data are already automatically shared with the tax authorities in a country
with 300 million people like the United States, as well as in countries like France
and Germany with populations of 60 and 80 million, respectively, so there is obviously
no reason why including the banks in the Cayman Islands and Switzerland would radically
increase the volume of data to be processed. Of course the tax havens regularly invoke
other excuses for maintaining bank secrecy. One of these is the alleged worry that
governments will misuse the information. This is not a very convincing argument: it
is hard to see why it would not also apply to information about the bank accounts
of those incautious enough to keep their money in the country where they pay taxes.
The most plausible reason why tax havens defend bank secrecy is that it allows their
clients to evade their fiscal obligations, thereby allowing the tax havens to share
in the gains. Obviously this has nothing whatsoever to do with the principles of the
market economy. No one has the right to set his own tax rates. It is not right for
individuals to grow wealthy from free trade and economic integration only to rake
off the profits at the expense of their neighbors. That is outright theft.