Capital in the Twenty-First Century (92 page)

Taking all these factors into account, what is the ideal schedule for a tax on capital,
and how much would such a tax bring in? To be clear, I am speaking here of a permanent
annual tax on capital at a rate that must therefore be fairly moderate. A tax collected
only once a generation, such as an inheritance tax, can be assessed at a very high
rate: a third, a half, or even two-thirds, as was the case for the largest estates
in Britain and the United States from 1930 to 1980.
²²
The same is true of exceptional one-time taxes on capital levied in unusual circumstances,
such as the tax levied on capital in France in 1945 at rates as high as 25 percent,
indeed 100 percent for additions to capital during the Occupation (1940–1945). Clearly,
such taxes cannot be applied for very long: if the government takes a quarter of the
nation’s wealth every year, there will be nothing left to tax after a few years. That
is why the rates of an annual tax on capital must be much lower, on the order of a
few percent. To some this may seem surprising, but it is actually quite a substantial
tax, since it is levied every year on the total stock of capital. For example, the
property tax rate is frequently just 0.5–1 percent of the value of real estate, or
a tenth to a quarter of the rental value of the property (assuming an average rental
return of 4 percent a year).
²³

The next point is important, and I want to insist on it: given the very high level
of private wealth in Europe today, a progressive annual tax on wealth at modest rates
could bring in significant revenue. Take, for example, a wealth tax of 0 percent on
fortunes below 1 million euros, 1 percent between 1 and 5 million euros, and 2 percent
above 5 million euros. If applied to all member states of the European Union, such
a tax would affect about 2.5 percent of the population and bring in revenues equivalent
to 2 percent of Europe’s GDP.
²⁴
The high return should come as no surprise: it is due simply to the fact that private
wealth in Europe today is worth more than five years of GDP, and much of that wealth
is concentrated in the upper centiles of the distribution.
²⁵
Although a tax on capital would not by itself bring in enough to finance the social
state, the additional revenues it would generate are nevertheless significant.

In principle, each member state of the European Union could generate similar revenues
by applying such a tax on its own. But without automatic sharing of bank information
both inside and outside EU territory (starting with Switzerland among nonmember states)
the risks of evasion would be very high. This partly explains why countries that have
adopted a wealth tax (such as France, which employs a tax schedule similar to the
one I am proposing) generally allow numerous exemptions, especially for “business
assets” and, in practice, for nearly all large stakes in listed and unlisted companies.
To do this is to drain much of the content from the progressive tax on capital, and
that is why existing taxes have generated revenues so much smaller than the ones described
above.
²⁶
An extreme example of the difficulties European countries face when they try to impose
a capital tax on their own can be seen in Italy. In 2012, the Italian government,
faced with one of the largest public debts in Europe and also with an exceptionally
high level of private wealth (also one of the highest in Europe, along with Spain),
²⁷
decided to introduce a new tax on wealth. But for fear that financial assets would
flee the country in search of refuge in Swiss, Austrian, and French banks, the rate
was set at 0.8 percent on real estate and only 0.1 percent on bank deposits and other
financial assets (except stocks, which were totally exempt), with no progressivity.
Not only is it hard to think of an economic principle that would explain why some
assets should be taxed at one-eighth the rate of others; the system also had the unfortunate
consequence of imposing a regressive tax on wealth, since the largest fortunes consist
mainly of financial assets and especially stocks. This design probably did little
to earn social acceptance for the new tax, which became a major issue in the 2013
Italian elections; the candidate who had proposed the tax—with the compliments of
European and international authorities—was roundly defeated at the polls. The crux
of the problem is this: without automatic sharing of bank information among European
countries, which would allow the tax authorities to obtain reliable information about
the net assets of all taxpayers, no matter where those assets are located, it is very
difficult for a country acting on its own to impose a progressive tax on capital.
This is especially unfortunate, because such a tax is a tool particularly well suited
to Europe’s current economic predicament.

Suppose that bank information is automatically shared and the tax authorities have
accurate assessments of who owns what, which may happen some day. What would then
be the ideal tax schedule? As usual, there is no mathematical formula for answering
this question, which is a matter for democratic deliberation. It would make sense
to tax net wealth below 200,000 euros at 0.1 percent and net wealth between 200,000
and 1 million euros at 0.5 percent. This would replace the property tax, which in
most countries is tantamount to a wealth tax on the propertied middle class. The new
system would be both more just and more efficient, because it targets all assets (not
only real estate) and relies on transparent data and market values net of mortgage
debt.
²⁸
To a large extent a tax of this sort could be readily implemented by individual countries
acting alone.

Note that there is no reason why the tax rate on fortunes above 5 million euros should
be limited to 2 percent. Since the real returns on the largest fortunes in Europe
and around the world are 6 to 7 percent or more, it would not be excessive to tax
fortunes above 100 million or 1 billion euros at rates well above 2 percent. The simplest
and fairest procedure would be to set rates on the basis of observed returns in each
wealth bracket over several prior years. In that way, the degree of progressivity
can be adjusted to match the evolution of returns to capital and the desired level
of wealth concentration. To avoid divergence of the wealth distribution (that is,
a steadily increasing share belonging to the top centiles and thousandths), which
on its face seems to be a minimal desirable objective, it would probably be necessary
to levy rates of about 5 percent on the largest fortunes. If a more ambitious goal
is preferred—say, to reduce wealth inequality to more moderate levels than exist today
(and which history shows are not necessary for growth)—one might envision rates of
10 percent or higher on billionaires. This is not the place to resolve the issue.
What is certain is that it makes little sense to take the yield on public debt as
a reference, as is often done in political debate.
²⁹
The largest fortunes are clearly not invested in government bonds.

Is a European wealth tax realistic? There is no technical reason why not. It is the
tool best suited to meet the economic challenges of the twenty-first century, especially
in Europe, where private wealth is thriving to a degree not seen since the Belle Époque.
But if the countries of the Old Continent are to cooperate more closely, European
political institutions will have to change. The only strong European institution at
the moment is the ECB, which is important but notoriously insufficient. I come back
to this in the next chapter, when I turn to the question of the public debt crisis.
Before that, it will be useful to look at the proposed tax on capital in a broader
historical perspective.

In all civilizations, the fact that the owners of capital claim a substantial share
of national income without working and that the rate of return on capital is generally
4–5 percent a year has provoked vehement, often indignant, reactions as well as a
variety of political responses. One of the most common of the latter has been the
prohibition of usury, which we find in one form or another in most religious traditions,
including those of Christianity and Islam. The Greek philosophers were of two minds
about interest, which, since time never ceases to flow, can in principle increase
wealth without limit. It was the danger of limitless wealth that Aristotle singled
out when he observed that the word “interest” in Greek (
tocos
) means “child.” In his view, money ought not to “give birth” to more money.
³⁰
In a world of low or even near-zero growth, where both population and output remained
more or less the same generation after generation, “limitlessness” seemed particularly
dangerous.

Unfortunately, the attempts to prohibit interest were often illogical. The effect
of outlawing loans at interest was generally to restrict certain types of investment
and certain categories of commercial or financial activity that the political or religious
authorities deemed less legitimate or worthy than others. They did not, however, question
the legitimacy of returns to capital in general. In the agrarian societies of Europe,
the Christian authorities never questioned the legitimacy of land rents, from which
they themselves benefited, as did the social groups on which they depended to maintain
the social order. The prohibition of usury in the society of that time is best thought
of as a form of social control: some types of capital were more difficult to control
than others and therefore more worrisome. The general principle according to which
capital can provide income for its owner, who need not work to justify it, went unquestioned.
The idea was rather to be wary of infinite accumulation. Income from capital was supposed
to be used in healthy ways, to pay for good works, for example, and certainly not
to launch into commercial or financial adventures that might lead to estrangement
from the true faith. Landed capital was in this respect very reassuring, since it
could do nothing but reproduce itself year after year and century after century.
³¹
Consequently, the whole social and spiritual order also seemed immutable. Land rent,
before it became the sworn enemy of democracy, was long seen as the wellspring of
social harmony, at least by those to whom it accrued.

The solution to the problem of capital suggested by Karl Marx and many other socialist
writers in the nineteenth century and put into practice in the Soviet Union and elsewhere
in the twentieth century was far more radical and, if nothing else, more logically
consistent. By abolishing private ownership of the means of production, including
land and buildings as well as industrial, financial, and business capital (other than
a few individual plots of land and small cooperatives), the Soviet experiment simultaneously
eliminated all private returns on capital. The prohibition of usury thus became general:
the rate of exploitation, which for Marx represented the share of output appropriated
by the capitalist, thus fell to zero, and with it the rate of private return. With
zero return on capital, man (or the worker) finally threw off his chains along with
the yoke of accumulated wealth. The present reasserted its rights over the past. The
inequality
r
>
g
was nothing but a bad memory, especially since communism vaunted its affection for
growth and technological progress. Unfortunately for the people caught up in these
totalitarian experiments, the problem was that private property and the market economy
do not serve solely to ensure the domination of capital over those who have nothing
to sell but their labor power. They also play a useful role in coordinating the actions
of millions of individuals, and it is not so easy to do without them. The human disasters
caused by Soviet-style centralized planning illustrate this quite clearly.

A tax on capital would be a less violent and more efficient response to the eternal
problem of private capital and its return. A progressive levy on individual wealth
would reassert control over capitalism in the name of the general interest while relying
on the forces of private property and competition. Each type of capital would be taxed
in the same way, with no discrimination a priori, in keeping with the principle that
investors are generally in a better position than the government to decide what to
invest in.
³²
If necessary, the tax can be quite steeply progressive on very large fortunes, but
this is a matter for democratic debate under a government of laws. A capital tax is
the most appropriate response to the inequality
r
>
g
as well as to the inequality of returns to capital as a function of the size of the
initial stake.
³³

In this form, the tax on capital is a new idea, designed explicitly for the globalized
patrimonial capitalism of the twenty-first century. To be sure, capital in the form
of land has been taxed since time immemorial. But property is generally taxed at a
low flat rate. The main purpose of the property tax is to guarantee property rights
by requiring registration of titles; it is certainly not to redistribute wealth. The
English, American, and French revolutions all conformed to this logic: the tax systems
they put in place were in no way intended to reduce inequalities of wealth. During
the French Revolution the idea of progressive taxation was the subject of lively debate,
but in the end the principle of progressivity was rejected. What is more, the boldest
tax proposals of that time seem quite moderate today in the sense that the proposed
tax rates were quite low.
³⁴

The progressive tax revolution had to await the twentieth century and the period between
the two world wars. It occurred in the midst of chaos and came primarily in the form
of progressive taxes on income and inheritances. To be sure, some countries (most
notably Germany and Sweden) established an annual progressive tax on capital as early
as the late nineteenth century or early twentieth. But the United States, Britain,
and France (until the 1980s) did not move in this direction.
³⁵
Furthermore, in the countries that did tax capital, the rates were relatively low,
no doubt because these taxes were designed in a context very different from that which
exists today. These taxes also suffered from a fundamental technical flaw: they were
based not on the market value of the assets subject to taxation, to be revised annually,
but on infrequently revised assessments of their value by the tax authorities. These
assessed valuations eventually lost all connection with market values, which quickly
rendered the taxes useless. The same flaw undermined the property tax in France and
many other countries subsequent to the inflationary shock of the period 1914–1945.
³⁶
Such a design flaw can be fatal to a progressive tax on capital: the threshold for
each tax bracket depends on more or less arbitrary factors such as the date of the
last property assessment in a given town or neighborhood. Challenges to such arbitrary
taxation became increasingly common after 1960, in a period of rapidly rising real
estate and stock prices. Often the courts became involved (to rule on violations of
the principle of equal taxation). Germany and Sweden abolished their annual taxes
on capital in 1990–2010. This had more to do with the archaic design of these taxes
(which went back to the nineteenth century) than with any response to tax competition.
³⁷