Capital in the Twenty-First Century (94 page)

It bears emphasizing, however, that redistribution through immigration, as desirable
as it may be, resolves only part of the problem of inequality. Even after average
per capita output and income are equalized between countries by way of immigration
and, even more, by poor countries catching up with rich ones in terms of productivity,
the problem of inequality—and in particular the dynamics of global wealth concentration—remains.
Redistribution through immigration postpones the problem but does not dispense with
the need for a new type of regulation: a social state with progressive taxes on income
and capital. One might hope, moreover, that immigration will be more readily accepted
by the less advantaged members of the wealthier societies if such institutions are
in place to ensure that the economic benefits of globalization are shared by everyone.
If you have free trade and free circulation of capital and people but destroy the
social state and all forms of progressive taxation, the temptations of defensive nationalism
and identity politics will very likely grow stronger than ever in both Europe and
the United States.

Note, finally, that the less developed countries will be among the primary beneficiaries
of a more just and transparent international tax system. In Africa, the outflow of
capital has always exceeded the inflow of foreign aid by a wide margin. It is no doubt
a good thing that several wealthy countries have launched judicial proceedings against
former African leaders who fled their countries with ill-gotten gains. But it would
be even more useful to establish international fiscal cooperation and data sharing
to enable countries in Africa and elsewhere to root out such pillage in a more systematic
and methodical fashion, especially since foreign companies and stockholders of all
nationalities are at least as guilty as unscrupulous African elites. Once again, financial
transparency and a progressive global tax on capital are the right answers.

{SIXTEEN}

The Question of the Public Debt

There are two main ways for a government to finance its expenses: taxes and debt.
In general, taxation is by far preferable to debt in terms of justice and efficiency.
The problem with debt is that it usually has to be repaid, so that debt financing
is in the interest of those who have the means to lend to the government. From the
standpoint of the general interest, it is normally preferable to tax the wealthy rather
than borrow from them. There are nevertheless many reasons, both good and bad, why
governments sometimes resort to borrowing and to accumulating debt (if they do not
inherit it from previous governments). At the moment, the rich countries of the world
are enmeshed in a seemingly interminable debt crisis. To be sure, history offers examples
of even higher public debt levels, as we saw in
Part Two
: in Britain in particular, public debt twice exceeded two years of national income,
first at the end of the Napoleonic wars and again after World War II. Still, with
public debt in the rich countries now averaging about one year of national income
(or 90 percent of GDP), the developed world is currently indebted at a level not seen
since 1945. Although the emerging economies are poorer than the rich ones in both
income and capital, their public debt is much lower (around 30 percent of GDP on average).
This shows that the question of public debt is a question of the distribution of wealth,
between public and private actors in particular, and not a question of absolute wealth.
The rich world is rich, but the governments of the rich world are poor. Europe is
the most extreme case: it has both the highest level of private wealth in the world
and the greatest difficulty in resolving its public debt crisis—a strange paradox.

I begin by examining various ways of dealing with high public debt levels. This will
lead to an analysis of how central banks regulate and redistribute capital and why
European unification, overly focused as it was on the issue of currency while neglecting
taxation and debt, has led to an impasse. Finally, I will explore the optimal accumulation
of public capital and its relation to private capital in the probable twenty-first-century
context of low growth and potential degradation of natural capital.

How can a public debt as large as today’s European debt be significantly reduced?
There are three main methods, which can be combined in various proportions: taxes
on capital, inflation, and austerity. An exceptional tax on private capital is the
most just and efficient solution. Failing that, inflation can play a useful role:
historically, that is how most large public debts have been dealt with. The worst
solution in terms of both justice and efficiency is a prolonged dose of austerity—yet
that is the course Europe is currently following.

I begin by recalling the structure of national wealth in Europe today. As I showed
in
Part Two
, national wealth in most European countries is close to six years of national income,
and most of it is owned by private agents (households). The total value of public
assets is approximately equal to the total public debt (about one year of national
income), so net public wealth is close to zero.
¹
Private wealth (net of debt) can be divided into two roughly equal halves: real estate
and financial assets. Europe’s average net asset position vis-à-vis the rest of the
world is close to equilibrium, which means that European firms and sovereign debt
are owned by European households (or, more precisely, what the rest of the world owns
of Europe is compensated by what Europeans own of the rest of the world). This reality
is obscured by the complexity of the system of financial intermediation: people deposit
their savings in a bank or invest in a financial product, and the bank then invests
the money elsewhere. There is also considerable cross-ownership between countries,
which makes things even more opaque. Yet the fact remains that European households
(or at any rate those that own anything at all: bear in mind that wealth is still
very concentrated, with 60 percent of the total owned by the wealthiest 10 percent)
own the equivalent of all that there is to own in Europe, including its public debt.
²

Under such conditions, how can public debt be reduced to zero? One solution would
be to privatize all public assets. According to the national accounts of the various
European countries, the proceeds from selling all public buildings, schools, universities,
hospitals, police stations, infrastructure, and so on would be roughly sufficient
to pay off all outstanding public debt.
³
Instead of holding public debt via their financial investments, the wealthiest European
households would become the direct owners of schools, hospitals, police stations,
and so on. Everyone else would then have to pay rent to use these assets and continue
to produce the associated public services. This solution, which some very serious
people actually advocate, should to my mind be dismissed out of hand. If the European
social state is to fulfill its mission adequately and durably, especially in the areas
of education, health, and security, it must continue to own the related public assets.
It is nevertheless important to understand that as things now stand, governments must
pay heavy interest (rather than rent) on their outstanding public debt, so the situation
is not all that different from paying rent to use the same assets, since these interest
payments weigh just as heavily on the public exchequer.

A much more satisfactory way of reducing the public debt is to levy an exceptional
tax on private capital. For example, a flat tax of 15 percent on private wealth would
yield nearly a year’s worth of national income and thus allow for immediate reimbursement
of all outstanding public debt. The state would continue to own its public assets,
but its debt would be reduced to zero after five years and it would therefore have
no interest to pay.
⁴
This solution is equivalent to a total repudiation of the public debt, except for
two essential differences.
⁵

First, it is always very difficult to predict the ultimate incidence of a debt repudiation,
even a partial one—that is, it is difficult to know who will actually bear the cost.
Complete or partial default on the public debt is sometimes tried in situations of
extreme overindebtedness, as in Greece in 2011–2012. Bondholders are forced to accept
a “haircut” (as the jargon has it): the value of government bonds held by banks and
other creditors is reduced by 10–20 percent or perhaps even more. The problem is that
if one applies a measure of this sort on a large scale—for example, all of Europe
and not just Greece (which accounts for just 2 percent of European GDP)—it is likely
to trigger a banking panic and a wave of bankruptcies. Depending on which banks are
holding various types of bonds, as well as on the structure of their balance sheets,
the identity of their creditors, the households that have invested their savings in
these various institutions, the nature of those investments, and so on, one can end
up with quite different final incidences, which cannot be accurately predicted in
advance. Furthermore, it is quite possible that the people with the largest portfolios
will be able to restructure their investments in time to avoid the haircut almost
entirely. People sometimes think that imposing a haircut is a way of penalizing those
investors who have taken the largest risks. Nothing could be further from the truth:
financial assets are constantly being traded, and there is no guarantee that the people
who would be penalized in the end are the ones who ought to be. The advantage of an
exceptional tax on capital, which is similar to a haircut, is precisely that it would
arrange things in a more civilized manner. Everyone would be required to contribute,
and, equally important, bank failures would be avoided, since it is the ultimate owners
of wealth (physical individuals) who would have to pay, not financial institutions.
If such a tax were to be levied, however, the tax authorities would of course need
to be permanently and automatically apprised of any bank accounts, stocks, bonds,
and other financial assets held by the citizens under their jurisdiction. Without
such a financial cadaster, every policy choice would be risky.

But the main advantage of a fiscal solution is that the contribution demanded of each
individual can be adjusted to the size of his fortune. It would not make much sense
to levy an exceptional tax of 15 percent on all private wealth in Europe. It would
be better to apply a progressive tax designed to spare the more modest fortunes and
require more of the largest ones. In some respects, this is what European banking
law already does, since it generally guarantees deposits up to 100,000 euros in case
of bank failure. The progressive capital tax is a generalization of this logic, since
it allows much finer gradations of required levies. One can imagine a number of different
brackets: full deposit guarantee up to 100,000 euros, partial guarantee between 100,000
and 500,000 euros, and so on, with as many brackets as seem useful. The progressive
tax would also apply to all assets (including listed and unlisted shares), not just
bank deposits. This is essential if one really wants to reach the wealthiest individuals,
who rarely keep their money in checking accounts.

In any event, it would no doubt be too much to try to reduce public debt to zero in
one fell swoop. To take a more realistic example, assume that we want to reduce European
government debt by around 20 percent of GDP, which would bring debt levels down from
the current 90 percent of GDP to 70 percent, not far from the maximum of 60 percent
set by current European treaties.
⁶
As noted in the previous chapter, a progressive tax on capital at a rate of 0 percent
on fortunes up to 1 million euros, 1 percent on fortunes between 1 and 5 million euros,
and 2 percent on fortunes larger than 5 million euros would bring in the equivalent
of about 2 percent of European GDP. To obtain one-time receipts of 20 percent of GDP,
it would therefore suffice to apply a special levy with rates 10 times as high: 0
percent up to 1 million, 10 percent between 1 and 5 million, and 20 percent above
5 million.
⁷
It is interesting to note that the exceptional tax on capital that France applied
in 1945 in order to substantially reduce its public debt had progressive rates that
ranged from 0 to 25 percent.
⁸

One could obtain the same result by applying a progressive tax with rates of 0, 1,
and 2 percent for a period of ten years and earmarking the receipts for debt reduction.
For example, one could set up a “redemption fund” similar to the one proposed in 2011
by a council of economists appointed by the German government. This proposal, which
was intended to mutualize all Eurozone public debt above 60 percent of GDP (and especially
the debt of Germany, France, Italy, and Spain) and then to reduce the fund gradually
to zero, is far from perfect. In particular, it lacks the democratic governance without
which the mutualization of European debt is not feasible. But it is a concrete plan
that could easily be combined with an exceptional one-time or special ten-year tax
on capital.
⁹

To recapitulate the argument thus far: I observed that an exceptional tax on capital
is the best way to reduce a large public debt. This is by far the most transparent,
just, and efficient method. Inflation is another possible option, however. Concretely,
since a government bond is a nominal asset (that is, an asset whose price is set in
advance and does not depend on inflation) rather than a real asset (whose price evolves
in response to the economic situation, generally increasing at least as fast as inflation,
as in the case of real estate and shares of stock), a small increase in the inflation
rate is enough to significantly reduce the real value of the public debt. With an
inflation rate of 5 percent a year rather than 2 percent, the real value of the public
debt, expressed as a percentage of GDP, would be reduced by more than 15 percent (all
other things equal)—a considerable amount.