Capital in the Twenty-First Century (83 page)

To gain a better understanding of what is at stake behind these figures, I want to
describe in somewhat greater detail what this historic increase in government tax
revenues was used for: the construction of a “social state.”
⁹
In the nineteenth century, governments were content to fulfill their “regalian” missions.
Today these same functions command a little less than one-tenth of national income.
The growing tax bite enabled governments to take on ever broader social functions,
which now consume between a quarter and a third of national income, depending on the
country. This can be broken down initially into two roughly equal halves: one half
goes to health and education, the other to replacement incomes and transfer payments.
¹⁰

Spending on education and health consumes 10–15 percent of national income in all
the developed countries today.
¹¹
There are significant differences between countries, however. Primary and secondary
education are almost entirely free for everyone in all the rich countries, but higher
education can be quite expensive, especially in the United States and to a lesser
extent in Britain. Public health insurance is universal (that is, open to the entire
population) in most countries in Europe, including Britain.
¹²
In the United States, however, it is reserved for the poor and elderly (which does
not prevent it from being very costly).
¹³
In all the developed countries, public spending covers much of the cost of education
and health services: about three-quarters in Europe and half in the United States.
The goal is to give equal access to these basic goods: every child should have access
to education, regardless of his or her parents’ income, and everyone should have access
to health care, even, indeed especially, when circumstances are difficult.

Replacement incomes and transfer payments generally consume 10–15 (or even 20) percent
of national income in most of the rich countries today. Unlike public spending on
education and health, which may be regarded as transfers in kind, replacement income
and transfer payments form part of household disposable income: the government takes
in large sums in taxes and social insurance contributions and then pays them out to
other households in the form of replacement income (pensions and unemployment compensation)
and transfer payments (family allowances, guaranteed income, etc.), so that the total
disposable income of all households in the aggregate remains unchanged.
¹⁴

In practice, pensions account for the lion’s share (two-thirds to three-quarters)
of total replacement income and transfer payments. Here, too, there are significant
differences between countries. In continental Europe, pensions alone often consume
12–13 percent of national income (with Italy and France at the top, ahead of Germany
and Sweden). In the United States and Britain, the public pension system is much more
drastically capped for those at the middle and top of the income hierarchy (the replacement
rate, that is, the amount of the pension in proportion to the wage earned prior to
retirement, falls rather quickly for those who earned above the average wage), and
pensions consume only 6–7 percent of national income.
¹⁵
These are very large sums in all cases: in all the rich countries, public pensions
are the main source of income for at least two-thirds of retirees (and generally three-quarters).
Despite the defects of these public pensions systems and the challenges they now face,
the fact is that without them it would have been impossible to eradicate poverty among
the elderly, which was endemic as recently as the 1950s. Along with access to education
and health, public pensions constitute the third social revolution that the fiscal
revolution of the twentieth century made possible.

Compared with pension outlays, payments for unemployment insurance are much smaller
(typically 1–2 percent of national income), reflecting the fact that people spend
less time in unemployment than in retirement. The replacement income is nevertheless
useful when needed. Finally, income support outlays are even smaller (less than 1
percent of national income), almost insignificant when measured against total government
spending. Yet this type of spending is often the most vigorously challenged: beneficiaries
are suspected of wanting to live their lives on the dole, even though the proportion
of the population relying on welfare payments is generally far smaller than for other
government programs, because the stigma attached to welfare (and in many cases the
complexity of the process) dissuades many who are entitled to benefits from asking
for them.
¹⁶
Welfare benefits are questioned not only in Europe but also in the United States
(where the unemployed black single mother is often singled out for criticism by opponents
of the US “welfare state”).
¹⁷
In both cases, the sums involved are in fact only a very small part of state social
spending.

All told, if we add up state spending on health and education (10–15 percent of national
income) and replacement and transfer payments (another 10–15 or perhaps as high as
20 percent of national income), we come up with total social spending (broadly speaking)
of 25–35 percent of national income, which accounts for nearly all of the increase
in government revenues in the wealthy countries in the twentieth century. In other
words, the growth of the fiscal state over the last century basically reflects the
constitution of a social state.

To sum up: modern redistribution does not consist in transferring income from the
rich to the poor, at least not in so explicit a way. It consists rather in financing
public services and replacement incomes that are more or less equal for everyone,
especially in the areas of health, education, and pensions. In the latter case, the
principle of equality often takes the form of a quasi proportionality between replacement
income and lifetime earnings.
¹⁸
For education and health, there is real equality of access for everyone regardless
of income (or parents’ income), at least in principle. Modern redistribution is built
around a logic of rights and a principle of equal access to a certain number of goods
deemed to be fundamental.

At a relatively abstract level, it is possible to find justifications for this rights-based
approach in various national political and philosophical traditions. The US Declaration
of Independence (1776) asserts that everyone has an equal right to the pursuit of
happiness.
¹⁹
In a sense, our modern belief in fundamental rights to education and health can be
linked to this assertion, even though it took quite a while to get there. Article
1 of the Declaration of the Rights of Man and the Citizen (1789) also proclaims that
“men are born free and remain free and equal in rights.” This is followed immediately,
however, by the statement that “social distinctions can be based only on common utility.”
This is an important addition: the second sentence alludes to the existence of very
real inequalities, even though the first asserts the principle of absolute equality.
Indeed, this is the central tension of any rights-based approach: how far do equal
rights extend? Do they simply guarantee the right to enter into free contract—the
equality of the market, which at the time of the French Revolution actually seemed
quite revolutionary? And if one includes equal rights to an education, to health care,
and to a pension, as the twentieth-century social state proposed, should one also
include rights to culture, housing, and travel?

The second sentence of article 1 of the Declaration of the Rights of Man of 1789 formulates
a kind of answer to this question, since it in a sense reverses the burden of proof:
equality is the norm, and inequality is acceptable only if based on “common utility.”
It remains to define the term “common utility.” The drafters of the Declaration were
thinking mainly of the abolition of the orders and privileges of the Ancien Régime,
which were seen at the time as the very epitome of arbitrary, useless inequality,
hence as not contributing to “common utility.” One can interpret the phrase more broadly,
however. One reasonable interpretation is that social inequalities are acceptable
only if they are in the interest of all and in particular of the most disadvantaged
social groups.
²⁰
Hence basic rights and material advantages must be extended insofar as possible to
everyone, as long as it is in the interest of those who have the fewest rights and
opportunities to do so.
²¹
The “difference principle” introduced by the US philosopher John Rawls in his
Theory of Justice
is similar in intent.
²²
And the “capabilities” approach favored by the Indian economist Amartya Sen is not
very different in its basic logic.
²³

At a purely theoretical level, there is in fact a certain (partly artificial) consensus
concerning the abstract principles of social justice. The disagreements become clearer
when one tries to give a little substance to these social rights and inequalities
and to anchor them in specific historical and economic contexts. In practice, the
conflicts have to do mainly with the means of effecting real improvement in the living
conditions of the least advantaged, the precise extent of the rights that can be granted
to all (in view of economic and budgetary constraints and the many related uncertainties),
and exactly what factors are within and beyond the control of individuals (where does
luck end and where do effort and merit begin?). Such questions will never be answered
by abstract principles or mathematical formulas. The only way to answer them is through
democratic deliberation and political confrontation. The institutions and rules that
govern democratic debate and decision-making therefore play a central role, as do
the relative power and persuasive capabilities of different social groups. The US
and French Revolutions both affirmed equality of rights as an absolute principle—a
progressive stance at that time. But in practice, during the nineteenth century, the
political systems that grew out of those revolutions concentrated mainly on the protection
of property rights.

Modern redistribution, as exemplified by the social states constructed by the wealthy
countries in the twentieth century, is based on a set of fundamental social rights:
to education, health, and retirement. Whatever limitations and challenges these systems
of taxation and social spending face today, they nevertheless marked an immense step
forward in historical terms. Partisan conflict aside, a broad consensus has formed
around these social systems, particularly in Europe, which remains deeply attached
to what is seen as a “European social model.” No major movement or important political
force seriously envisions a return to a world in which only 10 or 20 percent of national
income would go to taxes and government would be pared down to its regalian functions.
²⁴

On the other hand, there is no significant support for continuing to expand the social
state at its 1930–1980 growth rate (which would mean that by 2050–2060, 70–80 percent
of national income would go to taxes). In theory, of course, there is no reason why
a country cannot decide to devote two-thirds or three-quarters of its national income
to taxes, assuming that taxes are collected in a transparent and efficient manner
and used for purposes that everyone agrees are of high priority, such as education,
health, culture, clean energy, and sustainable development. Taxation is neither good
nor bad in itself. Everything depends on how taxes are collected and what they are
used for. There are nevertheless two good reasons to believe that such a drastic increase
in the size of the social state is neither realistic nor desirable, at least for the
foreseeable future.

First, the very rapid expansion of the role of government in the three decades after
World War II was greatly facilitated and accelerated by exceptionally rapid economic
growth, at least in continental Europe.
²⁵
When incomes are increasing 5 percent a year, it is not too difficult to get people
to agree to devote an increasing share of that growth to social spending (which therefore
increases more rapidly than the economy), especially when the need for better education,
more health care, and more generous pensions is obvious (given the very limited funds
allocated for these purposes from 1930 to 1950). The situation has been very different
since the 1980s: with per capita income growth of just over 1 percent a year, no one
wants large and steady tax increases, which would mean even slower if not negative
income growth. Of course it is possible to imagine a redistribution of income via
the tax system or more progressive tax rates applied to a more or less stable total
income, but it is very difficult to imagine a general and durable increase in the
average tax rate. The fact that tax revenues have stabilized in all the rich countries,
notwithstanding national differences and changes of government, is no accident (see
Figure 13.1
). Furthermore, it is by no means certain that social needs justify ongoing tax increases.
To be sure, there are objectively growing needs in the educational and health spheres,
which may well justify slight tax increases in the future. But the citizens of the
wealthy countries also have a legitimate need for enough income to purchase all sorts
of goods and services produced by the private sector—for instance, to travel, buy
clothing, obtain housing, avail themselves of new cultural services, purchase the
latest tablet, and so on. In a world of low productivity growth, on the order of 1–1.5
percent (which is in fact a decent rate of growth over the long term), society has
to choose among different types of needs, and there is no obvious reason to think
that nearly all needs should by paid for through taxation.