The current wealth tax in France (the impôt de solidarité sur la fortune, or ISF) is in some ways more modern: it is based on the market value of various types of assets, reevaluated annually. This is because the tax was created relatively recently: it was introduced in the 1980s, at a time when inflation, especially in asset prices, could not be ignored. There are perhaps advantages to being at odds with the rest of the developed world in regard to economic policy: in some cases it allows a country to be ahead of its time.38 Although the French ISF is based on market values, in which respect it resembles the ideal capital tax, it is nevertheless quite different from the ideal in other respects. As noted earlier, it is riddled with exemptions and based on self-declared asset holdings. In 2012, Italy introduced a rather strange wealth tax, which illustrates the limits of what a single country can do on its own in the current climate. The Spanish case is also interesting. The Spanish wealth tax, like the now defunct Swedish and German ones, is based on more or less arbitrary assessments of real estate and other assets. Collection of the tax was suspended in 2008–2010, then restored in 2011–2012 in the midst of an acute budget crisis, but without modifications to its structure.39 Similar tensions exist almost everywhere: although a capital tax seems logical in view of growing government needs (as large private fortunes increase and incomes stagnate, a government would have to be blind to pass up such a tempting source of revenue, no matter what party is in power), it is difficult to design such a tax properly within a single country.
To sum up: the capital tax is a new idea, which needs to be adapted to the globalized patrimonial capitalism of the twenty-first century. The designers of the tax must consider what tax schedule is appropriate, how the value of taxable assets should be assessed, and how information about asset ownership should be supplied automatically by banks and shared internationally so that the tax authorities need not rely on taxpayers to declare their own asset holdings.
Alternative Forms of Regulation: Protectionism and Capital Controls
Is there no alternative to the capital tax? No: there are other ways to regulate patrimonial capitalism in the twenty-first century, and some of these are already being tried in various parts of the world. Nevertheless, these alternative forms of regulation are less satisfactory than the capital tax and sometimes create more problems than they solve. As noted, the simplest way for a government to reclaim a measure of economic and financial sovereignty is to resort to protectionism and controls on capital. Protectionism is at times a useful way of sheltering relatively undeveloped sectors of a country’s economy (until domestic firms are ready to face international competition).40 It is also a valuable weapon against countries that do not respect the rules (of financial transparency, health norms, human rights, etc.), and it would be foolish for a country to rule out its potential use. Nevertheless, protectionism, when deployed on a large scale over a long period of time, is not in itself a source of prosperity or a creator of wealth. Historical experience suggests that a country that chooses this road while promising its people a robust improvement in their standard of living is likely to meet with serious disappointment. Furthermore, protectionism does nothing to counter the inequality r > g or the tendency for wealth to accumulate in fewer and fewer hands.
The question of capital controls is another matter. Since the 1980s, governments in most wealthy countries have advocated complete and absolute liberalization of capital flows, with no controls and no sharing of information about asset ownership among nations. International organizations such as the OECD, the World Bank, and the IMF promoted the same set of measures in the name of the latest in economic science.41 But the movement was propelled essentially by democratically elected governments, reflecting the dominant ideas of a particular historical moment marked by the fall of the Soviet Union and unlimited faith in capitalism and self-regulating markets. Since the financial crisis of 2008, serious doubts about the wisdom of this approach have arisen, and it is quite likely that the rich countries will have increasing recourse to capital controls in the decades ahead. The emerging world has shown the way, starting in the aftermath of the Asian financial crisis of 1998, which convinced many countries, including Indonesia, Brazil, and Russia, that the policies and “shock therapies” dictated by the international community were not always well advised and the time had come to set their own courses. The crisis also encouraged some countries to amass excessive reserves of foreign exchange. This may not be the optimal response to global economic instability, but it has the virtue of allowing single countries to cope with economic shocks without forfeiting their sovereignty.
The Mystery of Chinese Capital Regulation
It is important to recognize that some countries have always enforced capital controls and remained untouched by the stampede toward complete deregulation of financial flows and current accounts. A notable example of such a country is China, whose currency has never been convertible (though it may be someday, when China is convinced that it has accumulated sufficient reserves to bury any speculator who bets against the renminbi). China has also imposed strict controls on both incoming capital (no one can invest in or purchase a large Chinese firm without authorization from the government, which is generally granted only if the foreign investor is content to take a minority stake) and outgoing capital (no assets can be removed from China without government approval). The issue of outgoing capital is currently quite a sensitive one in China and is at the heart of the Chinese model of capital regulation. This raises a very simple question: Are China’s millionaires and billionaires, whose names are increasingly prevalent in global wealth rankings, truly the owners of their wealth? Can they, for example, take their money out of China if they wish? Although the answers to these questions are shrouded in mystery, there is no doubt that the Chinese notion of property rights is different from the European or American notions. It depends on a complex and evolving set of rights and duties. To take one example, a Chinese billionaire who acquired a 20 percent stake in Telecom China and who wished to move to Switzerland with his family while holding on to his shares and collecting millions of euros in dividends would very likely have a much harder time doing so than, say, a Russian oligarch, to judge by the fact that vast sums commonly leave Russia for suspect destinations. One never sees this in China, at least for now. In Russia, to be sure, an oligarch must take care not to tangle with the president, which can land him in prison. But if he can avoid such trouble, he can apparently live quite well on wealth derived from exploitation of Russia’s natural resources. In China things seem to be controlled more tightly. That is one of many reasons why the kinds of comparisons that one reads frequently in the Western press between the fortunes of wealthy Chinese political leaders and their US counterparts, who are said to be far less wealthy, probably cannot withstand close scrutiny.42
It is not my intention to defend China’s system of capital regulation, which is extremely opaque and probably unstable. Nevertheless, capital controls are one way of regulating and containing the dynamics of wealth inequality. Furthermore, China has a more progressive income tax than Russia (which adopted a flat tax in the 1990s, like most countries in the former Soviet bloc), though it is still not progressive enough. The revenues it brings in are invested in education, health, and infrastructure on a far larger scale than in other emerging countries such as India, which China has clearly outdistanced.43 If China wishes, and above all if its elites agree to allow the kind of democratic transparency and government of laws that go hand in hand with a modern tax system (by no means a certainty), then China is clearly large enough to impose the kind of progressive tax on income and capital that I have been discussing. In some respects, it is better equipped to meet these challenges than Europe is, because Europe must contend with political fragmentation and with a particularly intense form of tax competition, which may be with us for some time to come.44
In any case, if the European countries do not join together to regulate capital cooperatively and effectively, individual
countries are highly likely to impose their own controls and national preferences. (Indeed, this has already begun, with a sometimes irrational promotion of national champions and domestic stockholders, on the frequently illusory premise that they can be more easily controlled than foreign stockholders.) In this respect, China has a clear advantage and will be difficult to beat. The capital tax is the liberal form of capital control and is better suited to Europe’s comparative advantage.
The Redistribution of Petroleum Rents
When it comes to regulating global capitalism and the inequalities it generates, the geographic distribution of natural resources and especially of “petroleum rents” constitutes a special problem. International inequalities of wealth—and national destinies—are determined by the way borders were drawn, in many cases quite arbitrarily. If the world were a single global democratic community, an ideal capital tax would redistribute petroleum rents in an equitable manner. National laws sometimes do this by declaring natural resources to be common property. Such laws of course vary from country to country. It is to be hoped that democratic deliberation will point in the right direction. For example, if, tomorrow, someone were to find in her backyard a treasure greater than all of her country’s existing wealth combined, it is likely that a way would be found to amend the law to share that wealth in a reasonable manner (or so one hopes).
Since the world is not a single democratic community, however, the redistribution of natural resources is often decided in far less peaceful ways. In 1990–1991, just after the collapse of the Soviet Union, another fateful event took place. Iraq, a country of 35 million people, decided to invade its tiny neighbor, Kuwait, with barely 1 million people but in possession of petroleum reserves virtually equal to those of Iraq. This was in part a geographical accident, of course, but it was also the result of a stroke of the postcolonial pen: Western oil companies and their governments in some cases found it easier to do business with countries without too many people living in them (although the long-term wisdom of such a choice may be doubted). In any case, the Western powers and their allies immediately sent some 900,000 troops to restore the Kuwaitis as the sole legitimate owners of their oilfields (proof, if proof were needed, that governments can mobilize impressive resources to enforce their decisions when they choose to do so). This happened in 1991. The first Gulf war was followed by a second in 2003, in Iraq, with a somewhat sparser coalition of Western powers. The consequences of these events are still with us today.
It is not up to me to calculate the optimal schedule for the tax on petroleum capital that would ideally exist in a global political community based on social justice and utility, or even in a Middle Eastern political community. I observe simply that the unequal distribution of wealth in this region has attained unprecedented levels of injustice, which would surely have ceased to exist long ago were it not for foreign military protection. In 2012, the total budget of the Egyptian ministry of education for all primary, middle, and secondary schools and universities in a country of 85 million was less than $5 billion.45 A few hundred kilometers to the east, Saudi Arabia and its 20 million citizens enjoyed oil revenues of $300 billion, while Qatar and its 300,000 Qataris take in more than $100 billion annually. Meanwhile, the international community wonders if it ought to extend a loan of a few billion dollars to Egypt or wait until the country increases, as promised, its tax on carbonated drinks and cigarettes. Surely the international norm should be to prevent redistribution of wealth by force of arms insofar as it is possible to do so (particularly when the intention of the invader is to buy more arms, not to build schools, as was the case with the Iraqi invader in 1991). But such a norm should carry with it the obligation to find other ways to achieve a more just distribution of petroleum rents, be it by way of sanctions, taxes, or foreign aid, in order to give countries without oil the opportunity to develop.
Redistribution through Immigration
A seemingly more peaceful form of redistribution and regulation of global wealth inequality is immigration. Rather than move capital, which poses all sorts of difficulties, it is sometimes simpler to allow labor to move to places where wages are higher. This was of course the great contribution of the United States to global redistribution: the country grew from a population of barely 3 million at the time of the Revolutionary War to more than 300 million today, largely thanks to successive waves of immigration. That is why the United States is still a long way from becoming the new Old Europe, as I speculated it might in Chapter 14. Immigration is the mortar that holds the United States together, the stabilizing force that prevents accumulated capital from acquiring the importance it has in Europe; it is also the force that makes the increasingly large inequalities of labor income in the United States politically and socially bearable. For a fair proportion of Americans in the bottom 50 percent of the income distribution, these inequalities are of secondary importance for the very simple reason that they were born in a less wealthy country and see themselves as being on an upward trajectory. Note, moreover, that the mechanism of redistribution through immigration, which enables individuals born in poor countries to improve their lot by moving to a rich country, has lately been an important factor in Europe as well as the United States. In this respect, the distinction between the Old World and the New may be less salient than in the past.46
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.
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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.
Capital in the Twenty-First Century Page 63