Capital in the Twenty-First Century

by Thomas Piketty

In the United States, the most recent survey by the Federal Reserve, which covers the same years, indicates that the top decile own 72 percent of America’s wealth, while the bottom half claim just 2 percent.

At this point it will suffice to note that the stark contrast I have drawn here between two types of hyperinegalitarian society—a society of rentiers and a society of supermanagers—is naïve and overdrawn. The two types of inequality can coexist: there is no reason why a person can’t be both a supermanager and a rentier—and the fact that the concentration of wealth is currently much higher in the United States than in Europe suggests that this may well be the case in the United States today. And of course there is nothing to prevent the children of supermanagers from becoming rentiers. In practice, we find both logics at work in every society. Nevertheless, there is more than one way of achieving the same level of inequality, and what primarily characterizes the United States at the moment is a record level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large) together with a level of inequality of wealth less extreme than the levels observed in traditional societies or in Europe in the period 1900–1910. It is therefore essential to understand the conditions under which each of these two logics could develop, while keeping in mind that they may complement each other in the century ahead and combine their effects. If this happens, the future could hold in store a new world of inequality more extreme than any that preceded it.

The bulk of the growth of inequality came from “the 1 percent,” whose share of national income rose from 9 percent in the 1970s to about 20 percent in 2000

there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability.

The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period.

it is important to be aware of the fact that the United States’ internal imbalances are four times larger than its global imbalances.

The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms

First, this unprecedented increase in wage inequality does not appear to have been compensated by increased wage mobility over the course of a person’s career.

a very substantial and growing inequality of capital income since 1980 accounts for about one-third of the increase in income inequality in the United States—a far from negligible amount.

the vast majority (60 to 70 percent, depending on what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000–2010 consists of top managers. By comparison, athletes, actors, and artists of all kinds make up less than 5 percent of this group.42 In this sense, the new US inequality has much more to do with the advent of “supermanagers” than with that of “

In the long run, the best way to reduce inequalities with respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education.

if the United States (or France) invested more heavily in high-quality professional training and advanced educational opportunities and allowed broader segments of the population to have access to them, this would surely be the most effective way of increasing wages at the low to medium end of the scale and decreasing the upper decile’s share of both wages and total income.

Various studies carried out in the United States between 1980 and 2000, most notably by the economists David Card and Alan Krueger, showed that the US minimum wage had fallen to a level so low in that period that it could be raised without loss of employment, indeed at times with an increase in employment, as in the monopsony model.10 On the basis of these studies, it seems likely that the increase in the minimum wage of nearly 25 percent (from $7.25 to $9 an hour) currently envisaged by the Obama administration will have little or no effect on the number of jobs.

the increase in wage inequality in the United States is due mainly to increased pay at the very top end of the distribution: the top 1 percent and even more the top 0.1 percent. If we look at the entire top decile, we find that “the 9 percent” have progressed more rapidly than the average worker but not nearly at the same rate as “the 1 percent.” Concretely, those making between $100,000 and $200,000 a year have seen their pay increase only slightly more rapidly than the average, whereas those making more than $500,000 a year have seen their remuneration literally explode (and those above $1 million a year have risen even more rapidly).11

Simply put, wage inequalities increased rapidly in the United States and Britain because US and British corporations became much more tolerant of extremely generous pay packages after 1970.

it is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly clear in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.”35

the very large decrease in the top marginal income tax rate in the English-speaking countries after 1980 (despite the fact that Britain and the United States had pioneered nearly confiscatory taxes on incomes deemed to be indecent in earlier decades) seems to have totally transformed the way top executive pay is set, since top executives now had much stronger incentives than in the past to seek large raises.

the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.

In 1910, capital inequality there was very high, though still markedly lower than in Europe: the top decile owned about 80 percent of total wealth and the top centile around 45 percent (see Figure 10.5). Interestingly, the fact that inequality in the New World seemed to be catching up with inequality in old Europe greatly worried US economists at the time. Willford King’s book on the distribution of wealth in the United States in 1915—the first broad study of the question—is particularly illuminating in this regard.13 From today’s perspective, this may seem surprising: we have been accustomed for several decades now to the fact that the United States is more inegalitarian than Europe and even that many Americans are proud of the fact (often arguing that inequality is a prerequisite of entrepreneurial dynamism and decrying Europe as a sanctuary of Soviet-style egalitarianism). A century ago, however, both the perception and the reality were strictly the opposite: it was obvious to everyone that the New World was by nature less inegalitarian than old Europe, and this difference was also a subject of pride.

Times have changed.

This fundamental force for divergence, which I discussed briefly in the Introduction, functions as follows. Consider a world of low growth, on the order of, say, 0.5–1 percent a year, which was the case everywhere before the eighteenth and nineteenth centuries. The rate of return on capital, which is generally on the order of 4 or 5 percent a year, is therefore much higher than the growth rate. Concretely, this means that wealth accumulated in the past is recapitalized much more quickly than the economy grows, even when there is no income from labor.

the return on capital, net of taxes (and losses), fell to 1–1.5 percent in the period 1913–1950, which was less than the rate of growth. This novel situation continued in the period 1950–2012 owing to the exceptionally high growth rate. Ultimately, we find that in the twentieth century, both fiscal and nonfiscal shocks created a situation in which, for the first time in history, the net return on capital was less than the growth rate. A concatenation of circumstances (wartime destruction, progressive tax policies made possible by the shocks of 1914–1945, and exceptional growth during the three decades following the end of World War II) thus created a historically unprecedented situation, which lasted for nearly a century. All signs are, however, that it is about to end.

The fact that the return on capital is distinctly and persistently greater than the growth rate is a powerful force for a more unequal distribution of wealth.

Using the theoretical models described above, one can show that an effective tax rate of 30 percent, if applied to all forms of capital, can by itself account for a very significant deconcentration of wealth (roughly equal to the decrease in the top centile’s share that we see in the historical data).

In this context, it is important to note that the effect of the tax on capital income is not to reduce the total accumulation of wealth but to modify the structure of the wealth distribution over the long run. In terms of the theoretical model, as well as in the historical data, an increase in the tax on capital income from 0 to 30 percent (reducing the net return on capital from 5 to 3.5 percent) may well leave the total stock of capital unchanged over the long run for the simple reason that the decrease in the upper centile’s share of wealth is compensated by the rise of the middle class. This is precisely what happened in the twentieth century—although the lesson is sometimes forgotten today.

Simple simulations show that a progressive estate tax can greatly reduce the top centile’s share of wealth over the long run.

The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting, disproportionate importance to inequalities created in the past, and therefore to inheritance.

it was the wars of the twentieth century that, to a large extent, wiped away the past and transformed the structure of inequality. Today, in the second decade of the twenty-first century, inequalities of wealth that had supposedly disappeared are close to regaining or even surpassing their historical highs. The new global economy has brought with it both immense hopes (such as the eradication of poverty) and equally immense inequities (some individuals are now as wealthy as entire countries). Can we imagine a twenty-first century in which capitalism will be transcended in a more peaceful and more lasting way, or must we simply await the next crisis or the next war (this time truly global)? On the basis of the history I have brought to light here, can we imagine political institutions that might regulate today’s global patrimonial capitalism justly as well as efficiently?

the countries with the largest decreases in their top tax rates are also the countries where the top earners’ share of national income has increased the most (especially when it comes to the remuneration of executives of large firms). Conversely, the countries that did not reduce their top tax rates very much saw much more moderate increases in the top earners’ share of national income.

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.

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.

The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.

The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration.