Considerable confusion exists around these issues because comparisons are often made over periods of just a few years (a procedure that can be used to justify virtually any conclusion).41 Or one forgets to correct for population growth (which is the primary reason for the structural difference in GDP growth between the United States and Europe). Sometimes the level of per capita output (which has always been about 20 percent higher in the United States, in 1970–1980 as well as 2000–2010) is confused with the growth rate (which has been about the same on both continents over the past three decades).42 But the principal source of confusion is probably the catch-up phenomenon mentioned above. There can be no doubt that British and US decline ended in the 1970s, in the sense that growth rates in Britain and the United States, which had been lower than growth rates in Germany, France, Scandinavia, and Japan, ceased to be so. But it is also incontestable that the reason for this convergence is quite simple: Europe and Japan had caught up with the United States and Britain. Clearly, this had little to do with the conservative revolution in the latter two countries in the 1980s, at least to a first approximation.43
No doubt these issues are too strongly charged with emotion and too closely bound up with national identities and pride to allow for calm examination. Did Maggie Thatcher save Britain? Would Bill Gates’s innovations have existed without Ronald Reagan? Will Rhenish capitalism devour the French social model? In the face of such powerful existential anxieties, reason is often at a loss, especially since it is objectively quite difficult to draw perfectly precise and absolutely unassailable conclusions on the basis of growth rate comparisons that reveal differences of a few tenths of a percent. As for Bill Gates and Ronald Reagan, each with his own cult of personality (Did Bill invent the computer or just the mouse? Did Ronnie destroy the USSR single-handedly or with the help of the pope?), it may be useful to recall that the US economy was much more innovative in 1950–1970 than in 1990–2010, to judge by the fact that productivity growth was nearly twice as high in the former period as in the latter, and since the United States was in both periods at the world technology frontier, this difference must be related to the pace of innovation.44 A new argument has recently been advanced: it is possible that the US economy has become more innovative in recent years but that this innovation does not show up in the productivity figures because it spilled over into the other wealthy countries, which have thrived on US inventions. It would nevertheless be quite astonishing if the United States, which has not always been hailed for international altruism (Europeans regularly complain about US carbon emissions, while the poor countries complain about American stinginess) were proven not to have retained some of this enhanced productivity for itself. In theory, that is the purpose of patents. Clearly, the debate is nowhere close to over.45
In an attempt to make some progress on these issues, Emmanuel Saez, Stefanie Stantcheva, and I have tried to go beyond international comparisons and to make use of a new database containing information about executive compensation in listed companies throughout the developed world. Our findings suggest that skyrocketing executive pay is fairly well explained by the bargaining model (lower marginal tax rates encourage executives to negotiate harder for higher pay) and does not have much to do with a hypothetical increase in managerial productivity.46 We again found that the elasticity of executive pay is greater with respect to “luck” (that is, variations in earnings that cannot have been due to executive talent, because, for instance, other firms in the same sector did equally well) than with respect to “talent” (variations not explained by sector variables). As I explained in Chapter 9, this finding poses serious problems for the view that high executive pay is a reward for good performance. Furthermore, we found that elasticity with respect to luck—broadly speaking, the ability of executives to obtain raises not clearly justified by economic performance—was higher in countries where the top marginal tax rate was lower. Finally, we found that variations in the marginal tax rate can explain why executive pay rose sharply in some countries and not in others. In particular, variations in company size and in the importance of the financial sector definitely cannot explain the observed facts.47 Similarly, the idea that skyrocketing executive pay is due to lack of competition, and that more competitive markets and better corporate governance and control would put an end to it, seems unrealistic.48 Our findings suggest that only dissuasive taxation of the sort applied in the United States and Britain before 1980 can do the job.49 In regard to such a complex and comprehensive question (which involves political, social, and cultural as well as economic factors), it is obviously impossible to be totally certain: that is the beauty of the social sciences. It is likely, for instance, that social norms concerning executive pay directly influence the levels of compensation we observe in different countries, independent of the influence of tax rates. Nevertheless, the available evidence suggests that our explanatory model gives the best explanation of the observed facts.
Rethinking the Question of the Top Marginal Rate
These findings have important implications for the desirable degree of fiscal progressivity. Indeed, they indicate that levying confiscatory rates on top incomes is not only possible but also the only way to stem the observed increase in very high salaries. According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.50 Do not be misled by the apparent precision of this estimate: no mathematical formula or econometric estimate can tell us exactly what tax rate ought to be applied to what level of income. Only collective deliberation and democratic experimentation can do that. What is certain, however, is that our estimates pertain to extremely high levels of income, those observed in the top 1 percent or 0.5 percent of the income hierarchy. The evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior. Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking. I say more about international coordination in the next chapter; here I will simply note that the United States is big enough to apply this type of fiscal policy effectively. The idea that all US executives would immediately flee to Canada and Mexico and no one with the competence or motivation to run the economy would remain is not only contradicted by historical experience and by all the firm-level data at our disposal; it is also devoid of common sense. A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. In order for the government to obtain the revenues it sorely needs to develop the meager US social state and invest more in health and education (while reducing the federal deficit), taxes would also have to be raised on incomes lower in the distribution (for example, by imposing rates of 50 or 60 percent on incomes above $200,000).51 Such a social and fiscal policy is well within the reach of the United States.
Nevertheless, it seems quite unlikely that any such policy will be adopted anytime soon. It is not even certain that the top marginal income tax rate in the United States will be raised as high as 40 percent in Obama’s second term. Has the US political process been captured by the 1 percent? This idea has become increasingly popular among observers of the Washington political scene.52 For reasons of natural optimism as well as professional predilection, I am inclined to grant more influence to ideas and intellectual debate. Careful examination of various hypotheses and bodies of evidence, and access to better data, can influence political debate and perhaps push the process in a direction more favorable to the general interest. For example, as I noted in Part Three, US economists often underestimate the in
crease in top incomes because they rely on inadequate data (especially survey data that fails to capture the very highest incomes). As a result, they pay too much attention to wage gaps between workers with different skill levels (a crucial question for the long run but not very relevant to understanding why the 1 percent have pulled so far ahead—the dominant phenomenon from a macroeconomic point of view).53 The use of better data (in particular, tax data) may therefore ultimately focus attention on the right questions.
That said, the history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed. It was war that gave rise to progressive taxation, not the natural consequences of universal suffrage. The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interests—and that includes economists, who currently occupy an enviable place in the US income hierarchy.54 Some economists have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest.55 Although data on this are sparse, it also seems that US politicians of both parties are much wealthier than their European counterparts and in a totally different category from the average American, which might explain why they tend to confuse their own private interest with the general interest. Without a radical shock, it seems fairly likely that the current equilibrium will persist for quite some time. The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.
{FIFTEEN}
A Global Tax on Capital
To regulate the globalized patrimonial capitalism of the twenty-first century, rethinking the twentieth-century fiscal and social model and adapting it to today’s world will not be enough. To be sure, appropriate updating of the last century’s social-democratic and fiscal-liberal program is essential, as I tried to show in the previous two chapters, which focused on two fundamental institutions that were invented in the twentieth century and must continue to play a central role in the future: the social state and the progressive income tax. But if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapted to today’s challenges. The ideal tool would be a progressive global tax on capital, coupled with a very high level of international financial transparency. Such a tax would provide a way to avoid an endless inegalitarian spiral and to control the worrisome dynamics of global capital concentration. Whatever tools and regulations are actually decided on need to be measured against this ideal. I will begin by analyzing practical aspects of such a tax and then proceed to more general reflections about the regulation of capitalism from the prohibition of usury to Chinese capital controls.
A Global Tax on Capital: A Useful Utopia
A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon. To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues. But if the idea is utopian, it is nevertheless useful, for several reasons. First, even if nothing resembling this ideal is put into practice in the foreseeable future, it can serve as a worthwhile reference point, a standard against which alternative proposals can be measured. Admittedly, a global tax on capital would require a very high and no doubt unrealistic level of international cooperation. But countries wishing to move in this direction could very well do so incrementally, starting at the regional level (in Europe, for instance). Unless something like this happens, a defensive reaction of a nationalist stripe would very likely occur. For example, one might see a return to various forms of protectionism coupled with imposition of capital controls. Because such policies are seldom effective, however, they would very likely lead to frustration and increase international tensions. Protectionism and capital controls are actually unsatisfactory substitutes for the ideal form of regulation, which is a global tax on capital—a solution that has the merit of preserving economic openness while effectively regulating the global economy and justly distributing the benefits among and within nations. Many people will reject the global tax on capital as a dangerous illusion, just as the income tax was rejected in its time, a little more than a century ago. When looked at closely, however, this solution turns out to be far less dangerous than the alternatives.
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. S
till, 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.
Democratic and Financial Transparency
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.
Capital in the Twenty-First Century Page 60