Capital in the Twenty-First Century (89 page)

Furthermore, this “bargaining power” explanation is consistent with the fact that
there is no statistically significant relationship between the decrease in top marginal
tax rates and the rate of productivity growth in the developed countries since 1980.
Concretely, the crucial fact is that the rate of per capita GDP growth has been almost
exactly the same in all the rich countries since 1980. In contrast to what many people
in Britain and the United States believe, the true figures on growth (as best one
can judge from official national accounts data) show that Britain and the United States
have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or
Sweden.
³⁹
In other words, the reduction of top marginal income tax rates and the rise of top
incomes do not seem to have stimulated productivity (contrary to the predictions of
supply-side theory) or at any rate did not stimulate productivity enough to be statistically
detectable at the macro level.
⁴⁰

Considerable confusion exists around these issues because comparisons are often made
over periods of just a few years (a procedure that can be used to justify virtually
any conclusion).
⁴¹
Or one forgets to correct for population growth (which is the primary reason for
the structural difference in GDP growth between the United States and Europe). Sometimes
the level of per capita output (which has always been about 20 percent higher in the
United States, in 1970–1980 as well as 2000–2010) is confused with the growth rate
(which has been about the same on both continents over the past three decades).
⁴²
But the principal source of confusion is probably the catch-up phenomenon mentioned
above. There can be no doubt that British and US decline ended in the 1970s, in the
sense that growth rates in Britain and the United States, which had been lower than
growth rates in Germany, France, Scandinavia, and Japan, ceased to be so. But it is
also incontestable that the reason for this convergence is quite simple: Europe and
Japan had caught up with the United States and Britain. Clearly, this had little to
do with the conservative revolution in the latter two countries in the 1980s, at least
to a first approximation.
⁴³

No doubt these issues are too strongly charged with emotion and too closely bound
up with national identities and pride to allow for calm examination. Did Maggie Thatcher
save Britain? Would Bill Gates’s innovations have existed without Ronald Reagan? Will
Rhenish capitalism devour the French social model? In the face of such powerful existential
anxieties, reason is often at a loss, especially since it is objectively quite difficult
to draw perfectly precise and absolutely unassailable conclusions on the basis of
growth rate comparisons that reveal differences of a few tenths of a percent. As for
Bill Gates and Ronald Reagan, each with his own cult of personality (Did Bill invent
the computer or just the mouse? Did Ronnie destroy the USSR single-handedly or with
the help of the pope?), it may be useful to recall that the US economy was much more
innovative in 1950–1970 than in 1990–2010, to judge by the fact that productivity
growth was nearly twice as high in the former period as in the latter, and since the
United States was in both periods at the world technology frontier, this difference
must be related to the pace of innovation.
⁴⁴
A new argument has recently been advanced: it is possible that the US economy has
become more innovative in recent years but that this innovation does not show up in
the productivity figures because it spilled over into the other wealthy countries,
which have thrived on US inventions. It would nevertheless be quite astonishing if
the United States, which has not always been hailed for international altruism (Europeans
regularly complain about US carbon emissions, while the poor countries complain about
American stinginess) were proven not to have retained some of this enhanced productivity
for itself. In theory, that is the purpose of patents. Clearly, the debate is nowhere
close to over.
⁴⁵

In an attempt to make some progress on these issues, Emmanuel Saez, Stefanie Stantcheva,
and I have tried to go beyond international comparisons and to make use of a new database
containing information about executive compensation in listed companies throughout
the developed world. Our findings suggest that skyrocketing executive pay is fairly
well explained by the bargaining model (lower marginal tax rates encourage executives
to negotiate harder for higher pay) and does not have much to do with a hypothetical
increase in managerial productivity.
⁴⁶
We again found that the elasticity of executive pay is greater with respect to “luck”
(that is, variations in earnings that cannot have been due to executive talent, because,
for instance, other firms in the same sector did equally well) than with respect to
“talent” (variations not explained by sector variables). As I explained in
Chapter 9
, this finding poses serious problems for the view that high executive pay is a reward
for good performance. Furthermore, we found that elasticity with respect to luck—broadly
speaking, the ability of executives to obtain raises not clearly justified by economic
performance—was higher in countries where the top marginal tax rate was lower. Finally,
we found that variations in the marginal tax rate can explain why executive pay rose
sharply in some countries and not in others. In particular, variations in company
size and in the importance of the financial sector definitely cannot explain the observed
facts.
⁴⁷
Similarly, the idea that skyrocketing executive pay is due to lack of competition,
and that more competitive markets and better corporate governance and control would
put an end to it, seems unrealistic.
⁴⁸
Our findings suggest that only dissuasive taxation of the sort applied in the United
States and Britain before 1980 can do the job.
⁴⁹
In regard to such a complex and comprehensive question (which involves political,
social, and cultural as well as economic factors), it is obviously impossible to be
totally certain: that is the beauty of the social sciences. It is likely, for instance,
that social norms concerning executive pay directly influence the levels of compensation
we observe in different countries, independent of the influence of tax rates. Nevertheless,
the available evidence suggests that our explanatory model gives the best explanation
of the observed facts.

These findings have important implications for the desirable degree of fiscal progressivity.
Indeed, they indicate that levying confiscatory rates on top incomes is not only possible
but also the only way to stem the observed increase in very high salaries. According
to our estimates, the optimal top tax rate in the developed countries is probably
above 80 percent.
⁵⁰
Do not be misled by the apparent precision of this estimate: no mathematical formula
or econometric estimate can tell us exactly what tax rate ought to be applied to what
level of income. Only collective deliberation and democratic experimentation can do
that. What is certain, however, is that our estimates pertain to extremely high levels
of income, those observed in the top 1 percent or 0.5 percent of the income hierarchy.
The evidence suggests that a rate on the order of 80 percent on incomes over
$
500,000 or
$
1 million a year not only would not reduce the growth of the US economy but would
in fact distribute the fruits of growth more widely while imposing reasonable limits
on economically useless (or even harmful) behavior. Obviously it would be easier to
apply such a policy in a country the size of the United States than in a small European
country where close fiscal coordination with neighboring countries is lacking. I say
more about international coordination in the next chapter; here I will simply note
that the United States is big enough to apply this type of fiscal policy effectively.
The idea that all US executives would immediately flee to Canada and Mexico and no
one with the competence or motivation to run the economy would remain is not only
contradicted by historical experience and by all the firm-level data at our disposal;
it is also devoid of common sense. A rate of 80 percent applied to incomes above
$
500,000 or
$
1 million a year would not bring the government much in the way of revenue, because
it would quickly fulfill its objective: to drastically reduce remuneration at this
level but without reducing the productivity of the US economy, so that pay would rise
at lower levels. In order for the government to obtain the revenues it sorely needs
to develop the meager US social state and invest more in health and education (while
reducing the federal deficit), taxes would also have to be raised on incomes lower
in the distribution (for example, by imposing rates of 50 or 60 percent on incomes
above
$
200,000).
⁵¹
Such a social and fiscal policy is well within the reach of the United States.

Nevertheless, it seems quite unlikely that any such policy will be adopted anytime
soon. It is not even certain that the top marginal income tax rate in the United States
will be raised as high as 40 percent in Obama’s second term. Has the US political
process been captured by the 1 percent? This idea has become increasingly popular
among observers of the Washington political scene.
⁵²
For reasons of natural optimism as well as professional predilection, I am inclined
to grant more influence to ideas and intellectual debate. Careful examination of various
hypotheses and bodies of evidence, and access to better data, can influence political
debate and perhaps push the process in a direction more favorable to the general interest.
For example, as I noted in
Part Three
, US economists often underestimate the increase in top incomes because they rely
on inadequate data (especially survey data that fails to capture the very highest
incomes). As a result, they pay too much attention to wage gaps between workers with
different skill levels (a crucial question for the long run but not very relevant
to understanding why the 1 percent have pulled so far ahead—the dominant phenomenon
from a macroeconomic point of view).
⁵³
The use of better data (in particular, tax data) may therefore ultimately focus attention
on the right questions.

That said, the history of the progressive tax over the course of the twentieth century
suggests that the risk of a drift toward oligarchy is real and gives little reason
for optimism about where the United States is headed. It was war that gave rise to
progressive taxation, not the natural consequences of universal suffrage. The experience
of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too
great when economic and financial elites are obliged to defend their interests—and
that includes economists, who currently occupy an enviable place in the US income
hierarchy.
⁵⁴
Some economists have an unfortunate tendency to defend their private interest while
implausibly claiming to champion the general interest.
⁵⁵
Although data on this are sparse, it also seems that US politicians of both parties
are much wealthier than their European counterparts and in a totally different category
from the average American, which might explain why they tend to confuse their own
private interest with the general interest. Without a radical shock, it seems fairly
likely that the current equilibrium will persist for quite some time. The egalitarian
pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming
the Old Europe of the twenty-first century’s globalized economy.

{FIFTEEN}

A Global Tax on Capital

To regulate the globalized patrimonial capitalism of the twenty-first century, rethinking
the twentieth-century fiscal and social model and adapting it to today’s world will
not be enough. To be sure, appropriate updating of the last century’s social-democratic
and fiscal-liberal program is essential, as I tried to show in the previous two chapters,
which focused on two fundamental institutions that were invented in the twentieth
century and must continue to play a central role in the future: the social state and
the progressive income tax. But if democracy is to regain control over the globalized
financial capitalism of this century, it must also invent new tools, adapted to today’s
challenges. The ideal tool would be a progressive global tax on capital, coupled with
a very high level of international financial transparency. Such a tax would provide
a way to avoid an endless inegalitarian spiral and to control the worrisome dynamics
of global capital concentration. Whatever tools and regulations are actually decided
on need to be measured against this ideal. I will begin by analyzing practical aspects
of such a tax and then proceed to more general reflections about the regulation of
capitalism from the prohibition of usury to Chinese capital controls.

A global tax on capital is a utopian idea. It is hard to imagine the nations of the
world agreeing on any such thing anytime soon. To achieve this goal, they would have
to establish a tax schedule applicable to all wealth around the world and then decide
how to apportion the revenues. But if the idea is utopian, it is nevertheless useful,
for several reasons. First, even if nothing resembling this ideal is put into practice
in the foreseeable future, it can serve as a worthwhile reference point, a standard
against which alternative proposals can be measured. Admittedly, a global tax on capital
would require a very high and no doubt unrealistic level of international cooperation.
But countries wishing to move in this direction could very well do so incrementally,
starting at the regional level (in Europe, for instance). Unless something like this
happens, a defensive reaction of a nationalist stripe would very likely occur. For
example, one might see a return to various forms of protectionism coupled with imposition
of capital controls. Because such policies are seldom effective, however, they would
very likely lead to frustration and increase international tensions. Protectionism
and capital controls are actually unsatisfactory substitutes for the ideal form of
regulation, which is a global tax on capital—a solution that has the merit of preserving
economic openness while effectively regulating the global economy and justly distributing
the benefits among and within nations. Many people will reject the global tax on capital
as a dangerous illusion, just as the income tax was rejected in its time, a little
more than a century ago. When looked at closely, however, this solution turns out
to be far less dangerous than the alternatives.