Capital in the Twenty-First Century

by Thomas Piketty

  42. The comparison that one sees most often in the press sets the average wealth of the 535 members of the US House of Representatives (based on statements collected by the Center for Responsible Politics) against the average wealth of the seventy richest members of the Chinese People’s Assembly. The average net worth of the US House members is “only” $15 million, compared with more than $1 billion for the People’s Assembly members (according to the Hurun Report 2012, a Forbes-style ranking of Chinese fortunes based on a methodology that is not very clear). Given the relative population of the two countries, it would be more reasonable to compare the average wealth of all three thousand members of the Chinese Assembly (for which no estimate seems to be available). In any case, it appears that being elected to the Chinese Assembly is mainly an honorific post for these billionaires (who do not function as legislators). Perhaps it would be better to compare them to the seventy wealthiest US political donors.

  43. See N. Qian and Thomas Piketty, “Income Inequality and Progressive Income Taxation in China and India: 1986–2015,” American Economic Journal: Applied Economics 1, no. 2 (April 2009): 53–63.

  44. For a very long-run perspective, arguing that Europe long derived an advantage from its political fragmentation (because interstate competition spurred innovation, especially in military technology) before it become a handicap with respect to China, see Jean-Laurent Rosenthal and R. Bin Wong, Before and Beyond Divergence: The Politics of Economic Change in China and Europe (Cambridge, MA: Harvard University Press, 2011).

  45. See the online technical appendix.

  46. In the period 2000–2010, the rate of permanent integration (expressed as a percentage of the population of the receiving country) attained 0.6–0.7 percent a year in several European countries (Italy, Spain, Sweden, and Britain), compared with 0.4 percent in the United States and 0.2–0.3 percent in France and Germany. See the online technical appendix. Since the crisis, some of these flows have already begun to turn around, especially between southern Europe and Germany. Taken as a whole, permanent immigration in Europe was fairly close to North American levels in 2000–2010. The birthrate remains considerably higher in North America, however.

  16. The Question of the Public Debt

  1. See in particular Table 3.1.

  2. If we count assets owned by European households in tax havens, then Europe’s net asset position vis-à-vis the rest of the world becomes significantly positive: European households own the equivalent of all that there is to own in Europe plus a part of the rest of the world. See Figure 12.6.

  3. Together with the proceeds of the sale of public financial assets (which no longer amount to much compared with nonfinancial assets). See Chapters 3–5 and the online technical appendix.

  4. The elimination of interest payments on the debt would make it possible to reduce taxes and/or finance new investments, especially in education (see below).

  5. For the equivalence to be complete, wealth would have to be taxed in a manner consistent with the location of real estate and financial assets (including sovereign bonds issued in Europe) and not simply based on the residence of the owners. I will come back to this point later.

  6. I will come back later to the question of the optimal level of long-term public debt, which cannot be resolved independently of the question of the level of public and private capital accumulation.

  7. Other tax schedules can be simulated with the aid of Supplemental Table S15.1, available online.

  8. See Chapter 10.

  9. On the redemption fund, see German Council of Economic Experts, Annual Report 2011 (November 2011); The European Redemption Pact: Questions and Answers (January 2012). Technically, the two ideas can be perfectly complementary. Politically and symbolically, however, it is possible that the notion of “redemptions” (which connotes long and shared suffering by the entire population) may not sit well with the progressive capital tax, and the word “redemption” may be ill chosen.

  10. In addition to debt reduction through inflation, a major part of Germany’s debt was simply canceled by the Allies after World War II. (More precisely, repayment was postponed until an eventual German reunification, but it has not been repaid now that reunification has occurred.) According to calculations by the German historian Albrecht Ritschl, the amounts would be quite substantial if recapitalized at a reasonable rate. Some of this debt reflects occupation fees levied on Greece during the German occupation, which has led to endless and largely irreconcilable controversy. This further complicates today’s attempts to impose a pure logic of austerity and debt repayment. See Albrecht Ritschl, “Does Germany Owe Greece a Debt? The European Debt Crisis in Historical Perspective,” paper given at the OeNB 40th Economics Conference, Vienna (London School of Economics, 2012).

  11. If GDP grows 2 percent a year and debt 1 percent a year (assuming that one starts with a debt close to GDP), then the debt-to-GDP ratio will decrease by about 1 percent a year.

  12. The special one-time or ten-year tax on capital described above might be thought of as a way of applying primary surplus to debt reduction. The difference is that the tax would be a new resource that would not burden the majority of the population and not interfere with the rest of the government’s budget. In practice, there is a continuum of points involving various proportions of each solution (capital tax, inflation, austerity): everything depends on the dosage and the way the burdens of adjustment are shared among different social groups. The capital tax puts most of the burden on the very wealthy, whereas austerity policies generally aim to spare them.

  13. Savings from the 1920s were essentially wiped out by the stock market crash. Still, the inflation of 1945–1948 was an additional shock. The response was the “old-age minimum” (created in 1956) and the advent of a PAYGO pension system (which was created in 1945 but further developed subsequently).

  14. There are theoretical models based on this idea. See the online technical appendix.

  15. See in particular the results presented in Chapter 12.

  16. The same would be true in case of a breakup of the Eurozone. It is always possible to reduce public debt by printing money and generating inflation, but it is hard to control the distributive consequences of such a crisis, whether with the euro, the franc, the mark, or the lira.

  17. An often-cited historical example is the slight deflation (decrease of prices and wages) seen in the industrialized countries in the late nineteenth century. This deflation was resented by both employers and workers, who seemed to want to wait until other prices and wages fell before accepting decreases in the prices and wages that affected them directly. This resistance to wage and price adjustments is sometimes referred to as “nominal rigidity.” The most important argument in favor of low but positive inflation (typically 2 percent) is that it allows for easier adjustment of relative wages and prices than zero or negative inflation.

  18. The classic theory of Spanish decline blames gold and silver for a certain laxity of governance.

  19. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1857–1960 (Princeton: Princeton University Press, 1963).

  20. Note that there is no such thing as a “money printing press” in the following sense: when a central bank creates money in order to lend it to the government, the loan is recorded on the books of the central bank. This happens even in the most chaotic of times, as in France in 1944–1948. The money is not simply given as a gift. Again, everything depends on what happens next: if the money creation increases inflation, substantial redistribution of wealth can occur (for instance, the real value of the public debt can be reduced dramatically, to the detriment of private nominal assets). The overall effect on national income and capital depends on the impact of policy on the country’s overall level of economic activity. It can in theory be either positive or negative, just as loans to private actors can be. Central banks redistribute monetary wealth, but they do not have the ability to create new wealth directly.

  21.
Conversely, the interest rates demanded of countries deemed less solid rose to extremely high levels in 2011–2012 (6–7 percent in Italy and Spain and 15 percent in Greece). This is an indication that investors are skittish and uncertain about the immediate future.

  22. The sum of gross financial assets and liabilities is even higher, since it amounts to ten to twenty years of GDP in most of the developed countries (see Chapter 5). The central banks thus hold only a few percent of the total assets and liabilities of the rich countries. The balance sheets of the various central banks are published online on a weekly or monthly basis. The amount of each type of asset and liability on the balance sheet is known in aggregate (but is not broken down by recipient of central bank loans). Notes and specie represent only a small part of the balance sheet (generally about 2 percent of GDP), and most of the rest consists purely of bookkeeping entries, as is the case for the bank accounts of households, corporations, and governments. In the past, central bank balance sheets were sometimes as large as 90–100 percent of GDP (for example, in France in 1944–1945, after which the balance sheet was reduced to nothing by inflation). In the summer of 2013, the balance sheet of the Bank of Japan was close to 40 percent of GDP. For historical series of the balance sheets of the main central banks, see the online technical appendix. Examination of these balance sheets is instructive and shows that they are still a long way from the record levels of the past. Furthermore, inflation depends on many other forces, especially international wage and price competition, which is currently damping down inflationary tendencies while driving asset prices higher.

  23. As noted in the previous chapter, discussions about possible changes to European rules governing the sharing of bank data have only just begun in 2013 and are a long way from bearing fruit.

  24. In particular, a steeply progressive tax requires information on all assets held by a single individual in different accounts and at different banks (ideally not just in Cyprus but throughout the European Union). The advantage of a less progressive tax was that it could be applied to each bank individually.

  25. In France, the two hundred largest shareholders in the Banque de France were statutorily entitled to a central role in the governance of the bank from 1803 to 1936 and thus were empowered to determine the monetary policy of France. The Popular Front challenged this status quo by changing the rules to allow the government to name bank governors and subgovernors who were not shareholders. In 1945 the bank was nationalized. Since then, the Banque de France no longer has private shareholders and is a purely public institution, like most other central banks throughout the world.

  26. A key moment in the Greek crisis was the ECB’s announcement in December 2009 that it would no longer accept Greek bonds as collateral if Greece was downgraded by the bond rating agencies (even though nothing in its statutes obliged it to do so).

  27. Another, more technical limitation of the “redemption fund” is that given the magnitude of the “rollover” (much of the outstanding debt comes due within a few years and must be rolled over regularly, especially in Italy), the limit of 60 percent of GDP will be reached within a few years, hence eventually all public debt will have to be mutualized.

  28. The budgetary parliament might consist of fifty or so members from each of the large Eurozone countries, prorated by population. Members might be chosen from the financial and social affairs committees of the national parliaments or in some other fashion. The new European treaty adopted in 2012 provides for a “conference of national parliaments,” but this is a purely consultative body with no power of its own and a fortiori no common debt.

  29. The official version is that the virtually flat tax on deposits was adopted at the request of the Cypriot president, who allegedly wanted to tax small depositors heavily in order to prevent large depositors from fleeing. No doubt there is some truth to this: the crisis illustrates the predicament that small countries face in a globalized economy: to carve out a niche for themselves, they may be prepared to engage in ruthless tax competition in order to attract capital, even from the most disreputable sources. The problem is that we will never know the whole truth, since all the negotiations took place behind closed doors.

  30. The usual explanation is that French leaders remain traumatized by their defeat in the 2005 referendum on the European Constitutional Treaty. The argument is not totally convincing, because that treaty, whose main provisions were later adopted without approval by referendum, contained no important democratic innovation and gave all power to the council of heads of state and ministers, which simply ratifies Europe’s current state of impotence. It may be that France’s presidential political culture explains why reflection about European political union is less advanced in France than in Germany or Italy.

  31. Under François Hollande, the French government has been rhetorically in favor of mutualizing European debts but has made no specific proposal, pretending to believe that every country can continue to decide on its own how much debt it wishes to take on, which is impossible. Mutualization implies that there needs to be a vote on the total size of the debt. Each country could maintain its own debt, but its size would need to be modest, like state and municipal debts in the United States. Logically, the president of the Bundesbank regularly issues statements to the media that a credit card cannot be shared without agreement about how much can be spent in total.

  32. Progressive income and capital taxes are more satisfactory than corporate income taxes because they allow adjustment of the tax rate in accordance with the income or capital of each taxpayer, whereas the corporate tax is levied on all corporate profits at the same level, affecting large and small shareholders alike.

  33. To believe the statements of the managers of companies like Google, their reasoning is more or less as follows: “We contribute far more wealth to society than our profits and salaries suggest, so it is perfectly reasonable for us to pay low taxes.” Indeed, if a company or individual contributes marginal well-being to the rest of the economy greater than the price it charges for its products, then it is perfectly legitimate for it to pay less in tax or even to receive a subsidy (economists refer to this as a positive externality). The problem, obviously, is that it is in everyone’s interest to claim that he or she contributes a large positive externality to the rest of the world. Google has not of course offered the slightest evidence to prove that it actually does make such a contribution. In any case, it is obvious that it is not easy to manage a society in which each individual can set his or her own tax rate in this way.

  34. There was a recent proposal to pay international organizations the proceeds of a global wealth tax. Such a tax would become independent of nationality and could become a way to protect the right to multinationality. See Patrick Weil, “Let Them Eat Less Cake: An International Tax on the Wealthiest Citizens of the World,” Policy Network, May 26, 2011.

  35. This conclusion is similar to that of Dani Rodrik, who argues that the nation-state, democracy, and globalization are an unstable trio (one of the three must give way before the other two, at least to a certain extent). See Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: Norton, 2011).

  36. The system of “allowance for corporate equity” adopted in Belgium in 2006 authorizes the deduction from taxable corporate profits of an amount equal to the “normal” return on equity. This deduction is said to be the equivalent of the deduction of interest on corporate debt and is supposed to equalize the tax status of debt and equity. But Germany and more recently France have taken a different take: limiting interest deductions. Some participants in this debate, such as the IMF and to a certain extent the European Commission, claim that the two solutions are equivalent, although in fact they are not: if one deducts the “normal” return on both debt and equity, it is highly likely that the corporate tax will simply disappear.

  37. In particular, taxing different types of consumption goods at different rates allows for only crude targeting of the consumpt
ion tax by income class. The main reason why European governments are currently so fond of value-added taxes is that this type of tax allows for de facto taxation of imported goods and small-scale competitive devaluations. This is of course a zero-sum game: the competitive advantage vanishes if other countries do the same. It is one symptom of a monetary union with a low level of international cooperation. The other standard justification of a consumption tax relies on the idea of encouraging investment, but the conceptual basis of this approach is not clear (especially in periods when the capital/income ratio is relatively high).

  38. The purpose of the fiscal transactions tax is to decrease the number of very high-frequency financial transactions, which is no doubt a good thing. By definition, however, the tax will not raise much revenue, because its purpose is to dry up its source. Estimates of potential revenues are often optimistic. They cannot be much more than 0.5 percent of GDP, which is a good thing, because the tax cannot target different levels of individual incomes or wealth. See the online technical appendix.

  39. See Figures 10.9–11. To evaluate the golden rule, one must use the pretax rate of return on capital (supposed to be equal to the marginal productivity of capital).

  40. The original article, written with a certain ironic distance in the form of a fable, is worth rereading: Edmund Phelps, “The Golden Rule of Accumulation: A Fable for Growthmen,” American Economic Review 51, no. 4 (September 1961): 638–43. A similar idea, expressed less clearly and without allusion to the golden rule, can be found in Maurice Allais’s Economie et intérêt (Paris: Librairie des Publications Officielles, 1947) and in articles by Von Neumann (1945) and Malinvaud (1953). Note that all this work (including Phelps’s article) is purely theoretical and does not discuss what level of accumulation would be required to make r equal to g. See the online technical appendix.