Capital in the Twenty-First Century (93 page)

The current wealth tax in France (the impôt de solidarité sur la fortune, or ISF)
is in some ways more modern: it is based on the market value of various types of assets,
reevaluated annually. This is because the tax was created relatively recently: it
was introduced in the 1980s, at a time when inflation, especially in asset prices,
could not be ignored. There are perhaps advantages to being at odds with the rest
of the developed world in regard to economic policy: in some cases it allows a country
to be ahead of its time.
³⁸
Although the French ISF is based on market values, in which respect it resembles
the ideal capital tax, it is nevertheless quite different from the ideal in other
respects. As noted earlier, it is riddled with exemptions and based on self-declared
asset holdings. In 2012, Italy introduced a rather strange wealth tax, which illustrates
the limits of what a single country can do on its own in the current climate. The
Spanish case is also interesting. The Spanish wealth tax, like the now defunct Swedish
and German ones, is based on more or less arbitrary assessments of real estate and
other assets. Collection of the tax was suspended in 2008–2010, then restored in 2011–2012
in the midst of an acute budget crisis, but without modifications to its structure.
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Similar tensions exist almost everywhere: although a capital tax seems logical in
view of growing government needs (as large private fortunes increase and incomes stagnate,
a government would have to be blind to pass up such a tempting source of revenue,
no matter what party is in power), it is difficult to design such a tax properly within
a single country.

To sum up: the capital tax is a new idea, which needs to be adapted to the globalized
patrimonial capitalism of the twenty-first century. The designers of the tax must
consider what tax schedule is appropriate, how the value of taxable assets should
be assessed, and how information about asset ownership should be supplied automatically
by banks and shared internationally so that the tax authorities need not rely on taxpayers
to declare their own asset holdings.

Is there no alternative to the capital tax? No: there are other ways to regulate patrimonial
capitalism in the twenty-first century, and some of these are already being tried
in various parts of the world. Nevertheless, these alternative forms of regulation
are less satisfactory than the capital tax and sometimes create more problems than
they solve. As noted, the simplest way for a government to reclaim a measure of economic
and financial sovereignty is to resort to protectionism and controls on capital. Protectionism
is at times a useful way of sheltering relatively undeveloped sectors of a country’s
economy (until domestic firms are ready to face international competition).
⁴⁰
It is also a valuable weapon against countries that do not respect the rules (of
financial transparency, health norms, human rights, etc.), and it would be foolish
for a country to rule out its potential use. Nevertheless, protectionism, when deployed
on a large scale over a long period of time, is not in itself a source of prosperity
or a creator of wealth. Historical experience suggests that a country that chooses
this road while promising its people a robust improvement in their standard of living
is likely to meet with serious disappointment. Furthermore, protectionism does nothing
to counter the inequality
r
>
g
or the tendency for wealth to accumulate in fewer and fewer hands.

The question of capital controls is another matter. Since the 1980s, governments in
most wealthy countries have advocated complete and absolute liberalization of capital
flows, with no controls and no sharing of information about asset ownership among
nations. International organizations such as the OECD, the World Bank, and the IMF
promoted the same set of measures in the name of the latest in economic science.
⁴¹
But the movement was propelled essentially by democratically elected governments,
reflecting the dominant ideas of a particular historical moment marked by the fall
of the Soviet Union and unlimited faith in capitalism and self-regulating markets.
Since the financial crisis of 2008, serious doubts about the wisdom of this approach
have arisen, and it is quite likely that the rich countries will have increasing recourse
to capital controls in the decades ahead. The emerging world has shown the way, starting
in the aftermath of the Asian financial crisis of 1998, which convinced many countries,
including Indonesia, Brazil, and Russia, that the policies and “shock therapies” dictated
by the international community were not always well advised and the time had come
to set their own courses. The crisis also encouraged some countries to amass excessive
reserves of foreign exchange. This may not be the optimal response to global economic
instability, but it has the virtue of allowing single countries to cope with economic
shocks without forfeiting their sovereignty.

It is important to recognize that some countries have always enforced capital controls
and remained untouched by the stampede toward complete deregulation of financial flows
and current accounts. A notable example of such a country is China, whose currency
has never been convertible (though it may be someday, when China is convinced that
it has accumulated sufficient reserves to bury any speculator who bets against the
renminbi). China has also imposed strict controls on both incoming capital (no one
can invest in or purchase a large Chinese firm without authorization from the government,
which is generally granted only if the foreign investor is content to take a minority
stake) and outgoing capital (no assets can be removed from China without government
approval). The issue of outgoing capital is currently quite a sensitive one in China
and is at the heart of the Chinese model of capital regulation. This raises a very
simple question: Are China’s millionaires and billionaires, whose names are increasingly
prevalent in global wealth rankings, truly the owners of their wealth? Can they, for
example, take their money out of China if they wish? Although the answers to these
questions are shrouded in mystery, there is no doubt that the Chinese notion of property
rights is different from the European or American notions. It depends on a complex
and evolving set of rights and duties. To take one example, a Chinese billionaire
who acquired a 20 percent stake in Telecom China and who wished to move to Switzerland
with his family while holding on to his shares and collecting millions of euros in
dividends would very likely have a much harder time doing so than, say, a Russian
oligarch, to judge by the fact that vast sums commonly leave Russia for suspect destinations.
One never sees this in China, at least for now. In Russia, to be sure, an oligarch
must take care not to tangle with the president, which can land him in prison. But
if he can avoid such trouble, he can apparently live quite well on wealth derived
from exploitation of Russia’s natural resources. In China things seem to be controlled
more tightly. That is one of many reasons why the kinds of comparisons that one reads
frequently in the Western press between the fortunes of wealthy Chinese political
leaders and their US counterparts, who are said to be far less wealthy, probably cannot
withstand close scrutiny.
⁴²

It is not my intention to defend China’s system of capital regulation, which is extremely
opaque and probably unstable. Nevertheless, capital controls are one way of regulating
and containing the dynamics of wealth inequality. Furthermore, China has a more progressive
income tax than Russia (which adopted a flat tax in the 1990s, like most countries
in the former Soviet bloc), though it is still not progressive enough. The revenues
it brings in are invested in education, health, and infrastructure on a far larger
scale than in other emerging countries such as India, which China has clearly outdistanced.
⁴³
If China wishes, and above all if its elites agree to allow the kind of democratic
transparency and government of laws that go hand in hand with a modern tax system
(by no means a certainty), then China is clearly large enough to impose the kind of
progressive tax on income and capital that I have been discussing. In some respects,
it is better equipped to meet these challenges than Europe is, because Europe must
contend with political fragmentation and with a particularly intense form of tax competition,
which may be with us for some time to come.
⁴⁴

In any case, if the European countries do not join together to regulate capital cooperatively
and effectively, individual countries are highly likely to impose their own controls
and national preferences. (Indeed, this has already begun, with a sometimes irrational
promotion of national champions and domestic stockholders, on the frequently illusory
premise that they can be more easily controlled than foreign stockholders.) In this
respect, China has a clear advantage and will be difficult to beat. The capital tax
is the liberal form of capital control and is better suited to Europe’s comparative
advantage.

When it comes to regulating global capitalism and the inequalities it generates, the
geographic distribution of natural resources and especially of “petroleum rents” constitutes
a special problem. International inequalities of wealth—and national destinies—are
determined by the way borders were drawn, in many cases quite arbitrarily. If the
world were a single global democratic community, an ideal capital tax would redistribute
petroleum rents in an equitable manner. National laws sometimes do this by declaring
natural resources to be common property. Such laws of course vary from country to
country. It is to be hoped that democratic deliberation will point in the right direction.
For example, if, tomorrow, someone were to find in her backyard a treasure greater
than all of her country’s existing wealth combined, it is likely that a way would
be found to amend the law to share that wealth in a reasonable manner (or so one hopes).

Since the world is not a single democratic community, however, the redistribution
of natural resources is often decided in far less peaceful ways. In 1990–1991, just
after the collapse of the Soviet Union, another fateful event took place. Iraq, a
country of 35 million people, decided to invade its tiny neighbor, Kuwait, with barely
1 million people but in possession of petroleum reserves virtually equal to those
of Iraq. This was in part a geographical accident, of course, but it was also the
result of a stroke of the postcolonial pen: Western oil companies and their governments
in some cases found it easier to do business with countries without too many people
living in them (although the long-term wisdom of such a choice may be doubted). In
any case, the Western powers and their allies immediately sent some 900,000 troops
to restore the Kuwaitis as the sole legitimate owners of their oilfields (proof, if
proof were needed, that governments can mobilize impressive resources to enforce their
decisions when they choose to do so). This happened in 1991. The first Gulf war was
followed by a second in 2003, in Iraq, with a somewhat sparser coalition of Western
powers. The consequences of these events are still with us today.

It is not up to me to calculate the optimal schedule for the tax on petroleum capital
that would ideally exist in a global political community based on social justice and
utility, or even in a Middle Eastern political community. I observe simply that the
unequal distribution of wealth in this region has attained unprecedented levels of
injustice, which would surely have ceased to exist long ago were it not for foreign
military protection. In 2012, the total budget of the Egyptian ministry of education
for all primary, middle, and secondary schools and universities in a country of 85
million was less than
$
5 billion.
⁴⁵
A few hundred kilometers to the east, Saudi Arabia and its 20 million citizens enjoyed
oil revenues of
$
300 billion, while Qatar and its 300,000 Qataris take in more than
$
100 billion annually. Meanwhile, the international community wonders if it ought to
extend a loan of a few billion dollars to Egypt or wait until the country increases,
as promised, its tax on carbonated drinks and cigarettes. Surely the international
norm should be to prevent redistribution of wealth by force of arms insofar as it
is possible to do so (particularly when the intention of the invader is to buy more
arms, not to build schools, as was the case with the Iraqi invader in 1991). But such
a norm should carry with it the obligation to find other ways to achieve a more just
distribution of petroleum rents, be it by way of sanctions, taxes, or foreign aid,
in order to give countries without oil the opportunity to develop.

A seemingly more peaceful form of redistribution and regulation of global wealth inequality
is immigration. Rather than move capital, which poses all sorts of difficulties, it
is sometimes simpler to allow labor to move to places where wages are higher. This
was of course the great contribution of the United States to global redistribution:
the country grew from a population of barely 3 million at the time of the Revolutionary
War to more than 300 million today, largely thanks to successive waves of immigration.
That is why the United States is still a long way from becoming the new Old Europe,
as I speculated it might in
Chapter 14
. Immigration is the mortar that holds the United States together, the stabilizing
force that prevents accumulated capital from acquiring the importance it has in Europe;
it is also the force that makes the increasingly large inequalities of labor income
in the United States politically and socially bearable. For a fair proportion of Americans
in the bottom 50 percent of the income distribution, these inequalities are of secondary
importance for the very simple reason that they were born in a less wealthy country
and see themselves as being on an upward trajectory. Note, moreover, that the mechanism
of redistribution through immigration, which enables individuals born in poor countries
to improve their lot by moving to a rich country, has lately been an important factor
in Europe as well as the United States. In this respect, the distinction between the
Old World and the New may be less salient than in the past.
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