50. See Thomas Piketty and Nancy Qian, “Income Inequality and Progressive Income Taxation in China and India: 1986–2015,” American Economic Journal: Applied Economics 1, no. 2 (April 2009): 53–63. The difference between the two countries is closely related to the greater prevalence of wage labor in China. History shows that the construction of a fiscal and social state and of a wage-earner status often go together.
14. Rethinking the Progressive Income Tax
1. The British economist Nicholas Kaldor proposed such a tax, and I say more about it later, but for Kaldor it was a complement to progressive income and estate taxes, in order to ensure that they were not circumvented. It was not meant as a substitute for these taxes, as some have argued.
2. For example, in 1990, when some social contributions in France were extended to revenue streams other than employment income (including capital income and retiree income) to create what was called the “generalized social contribution,” (contribution sociale généralisée, or CSG), the corresponding receipts were reclassified as an income tax under international norms.
3. The poll tax, which was adopted in 1988 and abolished in 1991, was a local tax that required the same payment of every adult no matter what his or her income or wealth might be, so its rate was lower for the rich.
4. See Camille Landais, Thomas Piketty, and Emmanuel Saez, Pour une révolution fiscale: Un impôt sur le revenu pour le 21e siècle (Paris: Le Seuil, 2010), pp. 48–53. Also available at www.revolution-fiscale.fr.
5. In particular, the estimate fails to account for income hidden in tax havens (which, as indicated in Chapter 12, is quite a lot) and assumes that “tax shelters” are equally common at all levels of income and wealth (which probably leads to an overestimate of the real rate of taxation at the top of the hierarchy). Note, too, that the French tax system is exceptionally complex, with many special categories and overlapping taxes. (For example, France is the only developed country that does not withhold income tax at the source, even though social contributions have always been withheld at the source.) This complexity makes the system even more regressive and difficult to understand (just as the pension system is difficult to understand).
6. Only income from inherited capital is taxed under the progressive income tax (along with other capital income) and not inherited capital itself.
7. In France, for example, the average tax on estates and gifts is barely 5 percent; even for the top centile of inheritances, it is just 20 percent. See the online technical appendix.
8. See Figures 11.9–11 and the online technical appendix.
9. For example, instead of taxing the bottom 50 percent at a rate of 40–45 percent and the next 40 percent at a rate of 45–50 percent, one could tax the bottom group at 30–35 percent and the second group at 50–55 percent.
10. Given the low rate of intergenerational mobility, this would also be more just (in terms of the criteria of justice discussed in Chapter 13). See the online technical appendix.
11. The “general tax on income” (impôt général sur le revenu, or IGR) this law created is a progressive tax on total income. It was the forerunner of today’s income tax. It was modified by the law of July 31, 1917, creating what was called the cédulaire tax (which taxed different categories of income, such as corporate profits and wages, differently). This law was the forerunner of today’s corporate income tax. For details of the turbulent history of the income tax in France since the fundamental reforms of 1914–1917, see Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001), 233–334.
12. The progressive income tax was aimed primarily at top capital incomes (which everyone at the time knew dominated the income hierarchy), and it never would have occurred to anyone in any country to grant special exemptions to capital income.
13. For example, the many works the US economist Edwin Seligman published between 1890 and 1910 in praise of the progressive income tax were translated into many languages and stirred passionate debate. On this period and these debates, see Pierre Rosanvallon, La société des égaux (Paris: Le Seuil, 2011), 227–33. See also Nicolas Delalande, Les batailles de l’impôt: Consentement et résistances de 1789 à nos jours (Paris: Le Seuil, 2011).
14. The top tax rate is generally a “marginal” rate, in the sense that it applies only to the “margin,” or portion of income above a certain threshold. The top rate generally applies to less than 1 percent of the population (in some cases less than 0.1 percent). To have a comprehensive view of progressivity, it is better to look at the effective rates paid by different centiles of the income distribution (which can be much lower). The evolution of the top rate is nevertheless interesting, and by definition it gives an upper bound on the effective rate paid by the wealthiest individuals.
15. The top tax rates shown in Figure 14.1 do not include the increases of 25 percent introduced in 1920 for unmarried taxpayers without children and married taxpayers “who after two years of marriage still have no child.” (If we included them, the top rate would be 62 percent in 1920 and 90 percent in 1925.) This interesting provision of the law, which attests to the French obsession with the birthrate as well as to the limitless imagination of legislators when it comes to expressing a country’s hopes and fears through the tax rate, would later be rebaptized, from 1939 to 1944, the “family compensation tax,” which was extended from 1945 to 1951 through the family quotient system (under which married couples without a child, normally endowed with 2 shares, were decreased to 1.5 shares if they still had no child “after three years of marriage”). Note that the Constituent Assembly of 1945 increased by one year the grace period set in 1920 by the National Bloc. See Les hauts revenus en France, 233–334.
16. A progressive tax on total income had earlier been tried in Britain between the Napoleonic wars, as well as in the United States during the Civil War, but in both cases the taxes were repealed shortly after hostilities ended.
17. See Mirelle Touzery, L’invention de l’impôt sur le revenu: La taille tarifée 1715–1789 (Paris: Comité pour l’histoire économique et financière, 1994).
18. Business inventory and capital were subject to a separate tax, the patente. On the system of the quatre vieilles (the four direct taxes, which, along with the estate tax, formed the heart of the tax system created in 1791–1792), see Les hauts revenus en France, 234–239.
19. One of the many parliamentary committees to consider a progressive estate tax in the nineteenth century had this to say: “When a son succeeds his father, there is strictly speaking no transmission of property but merely continued enjoyment, according to the authors of the Civil Code. If this doctrine is taken to be absolute, then any tax on direct bequests is ruled out. In any case, extreme moderation in setting the rate of taxation is imperative.” See ibid., 245.
20. A professor at the Ecole Libre des Sciences Politiques and the Collège de France from 1880 to 1916 and outspoken champion of colonization among the conservative economists of the day, Leroy-Beaulieu was also the editor of L’économiste français, an influential weekly magazine roughly equivalent to the Economist today, especially in its limitless and often undiscerning zeal to defend the powerful interests of its time.
21. For instance, he noted with satisfaction that the number of indigents receiving assistance in France increased by only 40 percent from 1837 to 1860, whereas the number of assistance offices had nearly doubled. Apart from the fact that one would have to be very optimistic to deduce from these figures that the actual number of indigents had decreased (which Leroy-Beaulieu did not hesitate to do), a decrease in the absolute number of the poor in a context of economic growth would obviously tell us nothing about the evolution of income inequality. See ibid., 522–31.
22. At times one has the thought that he might have been responsible for the advertisements that HSBC plastered all over airport walls a few years ago: “We see a world of opportunities. Do you?”
23. Another classic argument
of the time was that the “inquisitorial” procedure of requiring taxpayers to declare their income might suit an “authoritarian” country like Germany but would immediately be rejected by a “free people” like the French. See Les hauts revenus en France, 481.
24. For instance, Joseph Caillaux, minister of finance at the time: “We have been led to believe and to say that France was a country of small fortunes, of infinitely fragmented and dispersed capital. The statistics with which the new estate tax regime provides us force us to retreat from this position.… Gentlemen, I cannot hide from you the fact that these figures have altered some of my preconceived ideas. The fact is that a small number of people possess the bulk of this country’s wealth.” See Joseph Caillaux, L’impôt sur le revenu (Paris: Berger, 1910), 530–32.
25. On the German debates, see Jens Beckert, tr. Thomas Dunlap, Inherited Wealth, (Princeton: Princeton University Press, 2008), 220–35. The rates shown in Figure 14.2 concern transmissions in the direct line (from parents to children). The rates on other bequests were always higher in France and Germany. In the United States and Britain, rates generally do not depend on the identity of the heir.
26. On the role of war in changing attitudes toward the estate tax, see Kenneth Scheve and David Stasavage, “Democracy, War, and Wealth: Evidence of Two Centuries of Inheritance Taxation,” American Political Science Review 106, no. 1 (February 2012): 81–102.
27. To take an extreme example, the Soviet Union never needed a confiscatory tax on excessive incomes or fortunes because its economic systems imposed direct controls on the distribution of primary incomes and almost totally outlawed private property (admittedly in ways that were much less respectful of the law). The Soviet Union did have an income tax at times, but it was relatively insignificant, with very low top rates. The same is true in China. I come back to this in the next chapter.
28. Pace Leroy-Beaulieu, King put France in the same league as Britain and Prussia, which was substantially correct.
29. See Irving Fisher, “Economists in Public Service: Annual Address of the President,” American Economic Review 9, no. 1 (March 1919): 5–21. Fisher took his inspiration mainly from the Italian economist Eugenio Rignano. See G. Erreygers and G. Di Bartolomeo, “The Debates on Eugenio Rignano’s Inheritance Tax Proposals,” History of Political Economy 39, no. 4 (Winter 2007): 605–38. The idea of taxing wealth that had been accumulated in the previous generation less heavily than older wealth that had been passed down through several generations is very interesting, in the sense that there is a stronger sense of double taxation in the former case than in the latter, even if different generations and therefore different individuals are involved in both cases. It is nevertheless difficult to formalize and implement this idea in practice (because estates often follow complex trajectories), which is probably why it has never been tried.
30. To this federal tax one should also add state income tax (which is generally 5–10 percent).
31. The top Japanese income tax rate rose to 85 percent in 1947–1949, when it was set by the US occupier, and then fell immediately to 55 percent in 1950 after Japan regained its fiscal sovereignty. See the online technical appendix.
32. These rates applied in the direct line of inheritance. The rates applied to brothers, sisters, cousins, and nonrelatives were sometimes higher in France and Germany. In France today, for example, the rate for bequests to nonrelatives is 60 percent. But rates never reached the 70–80 percent levels applied to children in the United States and Britain.
33. The record level of 98 percent was in force in Britain from 1941 to 1952 and again from 1974 to 1978. See the online technical appendix for the complete series. During the 1972 US presidential campaign, George McGovern, the Democratic candidate, went so far as to propose a top rate of 100 percent for the largest inheritances (the rate was then 77 percent) as part of his plan to introduce a guaranteed minimum income. McGovern’s crushing defeat by Nixon marked the beginning of the end of the United States’ enthusiasm for redistribution. See Beckert, Inherited Wealth, 196.
34. For example, when the top rate on capital income in Britain was 98 percent from 1974 to 1978, the top rate on labor income was 83 percent. See Supplemental Figure S14.1, available online.
35. British thinkers such as John Stuart Mill were already reflecting on inheritances in the nineteenth century. The reflection intensified in the interwar years as more sophisticated probate data became available. It continued after the war in the work of James Meade and Anthony Atkinson, which I cited previously. It is also worth mentioning that Nicholas Kaldor’s interesting proposal of a progressive tax on consumption (actually on luxury consumption) was directly inspired by his desire to require more of idle rentiers, whom he suspected of evading the progressive taxes on both estates and income through the use of trust funds, unlike university professors such as himself, who paid the income tax as required. See Nicholas Kaldor, An Expenditure Tax (London: Allen and Unwin, 1955).
36. See Josiah Wedgwood, The Economics of Inheritance (Harmondsworth, England: Pelican Books, 1929; new ed. 1939). Wedgwood meticulously analyzed the various forces at work. For example, he showed that charitable giving was of little consequence. His analysis led him to the conclusion that only a tax could achieve the equalization he desired. He also showed that French estates were nearly as concentrated as British ones in 1910, from which he concluded that egalitarian division of estates, as in France, though desirable, was clearly not enough to bring about social equality.
37. For France, I have included the generalized social contribution or CSG (currently 8 percent) in the income tax, which makes the current top rate 53 percent. See the online technical appendix for the complete series.
38. This is true not only of the United States and Britain (in the first group) and Germany, France, and Japan (in the second group) but also for all of the eighteen OECD countries for which we have data in the WTID that allow us to study the question. See Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” American Economic Journal: Economic Policy, forthcoming (fig. 3). See also the online technical appendix.
39. See Piketty et al., “Optimal Taxation of Top Labor Incomes,” figs. 3 and A1 and table 2. These results, which cover eighteen countries, are also available in the online technical appendix. This conclusion does not depend on the choice of starting and ending years. In all cases, there is no statistically significant relationship between the decrease in the top marginal tax rate and the rate of growth. In particular, starting in 1980 rather than 1960 or 1970 does not change the results. For growth rates in the wealth countries over the period 1970–2010, see also Table 5.1 here.
40. We can rule out an elasticity of labor supply greater than 0.1–0.2 and justify the optimal marginal income tax rate described below. All the details of the theoretical argument and results are available in Piketty et al., “Optimal Taxation of Top Labor Incomes,” and are summarized in the online technical appendix.
41. It is important to average over fairly long periods (of at least ten to twenty years) to have meaningful growth comparisons. Over shorter periods, growth rates vary for all sorts of reasons, and it is impossible to draw any valid conclusions.
42. The difference in per capita GDP stems from the fact that US citizens work more hours than Europeans. According to standard international data, GDP per hour worked is approximately the same in the United States as in the wealthiest countries of the European continent (but significantly lower in Britain: see the online technical appendix).
43. See in particular Figure 2.3.
44. Per capita GDP in the United States grew at 2.3 percent a year from 1950 to 1970, 2.2 percent between 1970 and 1990, and 1.4 percent from 1990 to 2012. See Figure 2.3.
45. The idea that the United States has innovated for the rest of the world was recently proposed by Daron Acemoglu, James Robinson, and Thierry Verdier, “Can’t We All Be More Like Scandinavians? Asymmetric Gr
owth and Institutions in an Interdependent World,” (MIT Department of Economics Working Paper no. 12–22, August 20, 2012). This is an essentially theoretical article, whose principal factual basis is that the number of patents per capita is higher in the United States than in Europe. This is interesting, but it seems to be at least partly a consequences of distinct legal practices, and in any case it should allow the innovative country to retain significantly higher productivity (or greater national income).
46. See Piketty et al., “Optimal Taxation of Top Labor Incomes,” fig. 5, tables 3–4. The results summarized here are based on detailed data concerning nearly three thousand firms in fourteen countries.
47. Xavier Gabaix and Augustin Landier argued that skyrocketing executive pay is a mechanical consequence of increased firm size (which supposedly increases the productivity of the most “talented” managers). See “Why Has CEO Pay Increased So Much?” Quarterly Journal of Economics 123, no. 1 (2008): 49–100. The problem is that this theory is based entirely on the marginal productivity model and cannot explain the large international variations observed in the data (company size increased in similar proportions nearly everywhere, but pay did not). The authors rely solely on US data, which unfortunately limits the possibilities for empirical testing.
48. Many economists defend the idea that greater competition can reduce inequality. See, for example, Raghuram G. Rajan and Luigi Zingales, Saving Capitalism from the Capitalists (New York: Crown Business, 2003), and L. Zingales, A Capitalism for the People (New York: Basic Books, 2012), or Acemoglu, Robinson, and Verdier, “Can’t We All Be More Like Scandinavians.” Some sociologists also take this line: see David B. Grusky, “Forum: What to Do about Inequality?” Boston Review, March 21, 2012.
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