Capital in the Twenty-First Century (116 page)

15
. In practice, the Dutch system is not completely satisfactory: many categories of
assets are exempt (particularly those held in family trusts), and the assumed return
is 4 percent for all assets, which may be too high for some fortunes and too low for
others.

16
. The most logical approach is to measure this insufficiency on the basis of average
rates of return observed for fortunes of each category so as to make the income tax
schedule consistent with the capital tax schedule. One might also consider minimum
and maximum taxes as a function of capital income. See the online technical appendix.

17
. The incentive argument is central to Maurice Allais’s tendentious
L’impôt sur le capital et la réforme monétaire
(Paris: Editions Hermann, 1977), in which Allais went so far as to advocate complete
elimination of the income tax and all other taxes in favor of a tax on capital. This
is an extravagant idea and not very sensible, given the amounts of money involved.
On Allais’s argument and current extensions of it, see the online technical appendix.
Broadly speaking, discussions of a tax on capital often push people into extreme positions
(so that they either reject the idea out of hand or embrace it as the one and only
tax, destined to replace all others). The same is true of the estate tax (either they
shouldn’t be taxed at all or should be taxed at 100 percent). In my view, it is urgent
to lower the temperature of the debate and give each argument and each type of tax
its due. A capital tax is useful, but it cannot replace all other taxes.

18
. The same is true of an unemployed worker who has to continue paying a high property
tax (especially when mortgage payments are not deductible). The consequences for overindebted
households can be dramatic.

19
. This compromise depends on the respective importance of individual incentives and
random shocks in determining the return on capital. In some cases it may be preferable
to tax capital income less heavily than labor income (and to rely primarily on a tax
on the capital stock), while in others it might make sense to tax capital income more
heavily (as was the case in Britain and the United States before 1980, no doubt because
capital income was seen as particularly arbitrary). See Thomas Piketty and Emmanuel
Saez,
A Theory of Optimal Capital Taxation,
NBER Working Paper 17989 (April 2012); a shorter version is available as “A Theory
of Optimal Inheritance Taxation,”
Econometrica
81, no. 5 (September 2013): 1851–86.

20
. This is because the capitalized value of the inheritance over the lifetime of the
recipient is not known at the moment of transmission. When a Paris apartment worth
100,000 francs in 1972 passed to an heir, no one knew that the property would be worth
a million euros in 2013 and afford a saving on rent of more than 40,000 euros a year.
Rather than tax the inheritance heavily in 1972, it is more efficient to assess a
smaller inheritance tax but to requirement payment of an annual property tax, a tax
on rent, and perhaps a wealth tax as the value of the property and its return increase
over time.

21
. See Piketty and Saez, “Theory of Optimal Capital Taxation”; see also the online
technical appendix.

22
. See
Figure 14.2

23
. For example, on real estate worth 500,000 euros, the annual tax would be between
2,500 and 5,000 euros, and the rental value of the property would be about 20,000
euros a year. By construction, a 4–5 percent annual tax on all capital would consume
nearly all of capital’s share of national income, which seems neither just nor realistic,
particularly since there are already taxes on capital income.

24
. About 2.5 percent of the adult population of Europe possessed fortunes above 1 million
euros in 2013, and about 0.2 percent above 5 million. The annual revenue from the
proposed tax would be about 300 billion euros on a GDP of nearly 15 trillion. See
the online technical appendix and Supplemental Table S5.1, available online, for a
detailed estimate and a simple simulator with which one can estimate the number of
taxpayers and the amount of revenue associated with other possible tax schedules.

25
. The top centile currently owns about 25 percent of total wealth, or about 125 percent
of European GDP. The wealthiest 2.5 percent own nearly 40 percent of total wealth,
or about 200 percent of European GDP. Hence it is no surprise that a tax with marginal
rates of 1 or 2 percent would bring in about two points of GDP. Revenues would be
even higher if these rates applied to all wealth and not just to the fractions over
the thresholds.

26
. The French wealth tax, called the “solidarity tax on wealth,” (impôt de solidarité
sur la fortune, or ISF), applies today to taxable wealth above 1.3 million euros (after
a deduction of 30 percent on the primary residence), with rates ranging from 0.7 to
1.5 percent on the highest bracket (over 10 million euros). Allowing for deductions
and exemptions, the tax generates revenues worth less than 0.5 percent of GDP. In
theory, an asset is called a business asset if the owner is active in the associated
business. In practice, this condition is rather vague and easily circumvented, especially
since additional exemptions have been added over the years (such as “stockholder agreements,”
which allow for partial or total exemptions if a group of stockholders agrees to maintain
its investment for a certain period of time). According to the available data, the
wealthiest individuals in France largely avoid paying the wealth tax. The tax authorities
publish very few detailed statistics for each tax bracket (much fewer, for example,
than in the case of the inheritance tax from the early twentieth century to the 1950s);
this makes the whole operation even more opaque. See the online technical appendix.

27
. See esp.
Chapter 5
,
Figures 5.4
and following.

28
. The progressive capital tax would then bring in 3–4 percent of GDP, of which 1 or
2 points would come from the property tax replacement. See the online technical appendix.

29
. For example, to justify the recent decrease of the top wealth tax rate in France
from 1.8 to 1.5 percent.

30
. See P. Judet de la Combe, “Le jour où Solon a aboli la dette des Athéniens,”
Libération,
May 31, 2010.

31
. In fact, as I have shown, capital in the form of land included improvements to the
land, increasingly so over the years, so that in the long run landed capital was not
very different from other forms of accumulable capital. Still, accumulation of landed
capital was subject to certain natural limits, and its predominance implied that the
economy could only grow very slowly.

32
. This does not mean that other “stakeholders” (including workers, collectivities,
associations, etc.) should be denied the means to influence investment decisions by
granting them appropriate voting rights. Here, financial transparency can play a key
role. I come back to this in the next chapter.

33
. The optimal rate of the capital tax will of course depend on the gap between the
return on capital,
r
, and the growth rate,
g
, with an eye to limiting the effect of
r
>
g
. For example, under certain hypotheses, the optimal inheritance tax rate is given
by the formula
t
=
1
−
G
/
R
, where
G
is the generational growth rate and
R
the generational return on capital (so that the tax approaches 100 percent when growth
is extremely small relative to return on capital, and approaches 0 percent when the
growth rate is close to the return on capital). In general, however, things are more
complex, because the ideal system requires a progressive annual tax on capital. The
principal optimal tax formulas are presented and explained in the online technical
appendix (but only in order to clarify the terms of debate, not to provide ready-made
solutions, since many forces are at work and it is difficult to evaluate the effect
of each with any precision).

34
. Thomas Paine, in his pamphlet
Agrarian Justice
(1795), proposed a 10 percent inheritance tax (which in his view corresponded to
the “unaccumulated” portion of the estate, whereas the “accumulated” portion was not
to be taxed at all, even if it dated back several generations). Certain “national
heredity tax” proposals during the French Revolution were more radical. After much
debate, however, the tax on direct line transmissions was set at no more than 2 percent.
On these debates and proposals, see the online technical appendix.

35
. Despite much discussion and numerous proposals in the United States and Britain,
especially in the 1960s and again in the early 2000s. See the online technical appendix.

36
. This design flaw stemmed from the fact that these capital taxes originated in the
nineteenth century, when inflation was insignificant or nonexistent and it was deemed
sufficient to reassess asset values every ten or fifteen years (for real estate) or
to base values on actual transactions (which was often done for financial assets).
This system of assessment was profoundly disrupted by the inflation of 1914–1945 and
was never made to work properly in a world of substantial permanent inflation.

37
. On the history of the German capital tax, from its creation in Prussia to its suspension
in 1997 (the law was not formally repealed), see Fabien Dell,
L’Allemagne inégale,
PhD diss., Paris School of Economics, 2008. On the Swedish capital tax, created in
1947 (but which actually existed as a supplementary tax on capital income since the
1910s) and abolished in 2007, see the previously cited work of Ohlsson and Waldenström
and the references given in the appendix. The rates of these taxes generally remained
under 1.5–2 percent on the largest fortunes, with a peak in Sweden of 4 percent in
1983 (which applied only to assessed values largely unrelated to market values). Apart
from the degeneration of the tax base, which also affected the estate tax in both
countries, the perception of fiscal competition also played a role in Sweden, where
the estate tax was abolished in 2005. This episode, at odds with Sweden’s egalitarian
values, is a good example of the growing inability of smaller countries to maintain
an independent fiscal policy.

38
. The wealth tax (on large fortunes) was introduced in France in 1981, abolished in
1986, and then reintroduced in 1988 as the “solidarity tax on wealth.” Market values
can change abruptly, and this can seem to introduce an element of arbitrariness into
the wealth tax, but they are the only objective and universally acceptable basis for
such a tax. Nevertheless, rates and tax brackets must be adjusted regularly, and care
must be taken not to allow receipts to rise automatically with real estate prices,
for this can provoke tax revolts, as illustrated by the famous Proposition 13 adopted
in California in 1978 to limit rising property taxes.

39
. The Spanish tax is assessed on fortunes greater than 700,000 euros in taxable assets
(with a deduction of 300,000 euros for the principal residence), and the highest rate
is 2.5 percent (2.75 percent in Catalonia). There is also an annual capital tax in
Switzerland, with relatively low rates (less than 1 percent) due to competition among
cantons.

40
. Or to prevent a foreign competitor from developing (the destruction of the nascent
Indian textile industry by the British colonizer in the early nineteenth century is
etched into the memory of Indians). This can have lasting consequences.

41
. This is all the more astonishing given that the rare estimates of the economic gains
due to financial integration suggest a rather modest global gain (without even allowing
for the negative effects on inequality and instability, which these studies ignore).
See Pierre-Olivier Gourinchas and Olivier Jeanne, “The Elusive Gains from International
Financial Integration,”
Review of Economic Studies
73, no. 3 (2006): 715–41. Note that the IMF’s position on automatic transmission
of information has been vague and variable: the principle is approved, the better
to torpedo its concrete application on the basis of rather unconvincing technical
arguments.

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).