Capital in the Twenty-First Century

by Thomas Piketty

It is important to understand that a tax is always more than just a tax: it is also a way of defining norms and categories and imposing a legal framework on economic activity. This has always been the case, especially in regard to land ownership.

In France, for example, the government knows that Monsieur X owns an apartment worth 400,000 euros and a stock portfolio worth 200,000 euros and has 100,000 euros in outstanding debts. It could thus send him a form indicating these various amounts (along with his net worth of 500,000 euros) with a request for corrections and additions if appropriate. This type of automated system, applied to the entire population, is far better adapted to the twenty-first century than the archaic method of asking all persons to declare honestly how much they own.

There are two distinct justifications of a capital tax: a contributive justification and an incentive justification. The contributive logic is quite simple: income is often not a well-defined concept for very wealthy individuals, and only a direct tax on capital can correctly gauge the contributive capacity of the wealthy. Concretely, imagine a person with a fortune of 10 billion euros. As we saw in our examination of the Forbes rankings, fortunes of this magnitude have increased very rapidly over the past three decades, with real growth rates of 6–7 percent a year or even higher for the wealthiest individuals (such as Liliane Bettencourt and Bill Gates).11 By definition, this means that income in the economic sense, including dividends, capital gains, and all other new resources capable of financing consumption and increasing the capital stock, amounted to at least 6–7 percent of the individual’s capital (assuming that virtually none of this is consumed).

The crucial point here is that no tax evasion or undeclared Swiss bank account is involved (as far as we know). Even a person of the most refined taste and elegance cannot easily spend 500 million euros a year on current expenses. It is generally enough to take a few million a year in dividends (or some other type of payout) while leaving the remainder of the return on one’s capital to accumulate in a family trust or other ad hoc legal entity created for the sole purpose of managing a fortune of this magnitude, just as university endowments are managed.

It was the danger of limitless wealth that Aristotle singled out when he observed that the word “interest” in Greek (tocos) means “child.” In his view, money ought not to “give birth” to more money.30 In a world of low or even near-zero growth, where both population and output remained more or less the same generation after generation, “limitlessness” seemed particularly dangerous.

Income from capital was supposed to be used in healthy ways, to pay for good works, for example, and certainly not to launch into commercial or financial adventures that might lead to estrangement from the true faith. Landed capital was in this respect very reassuring, since it could do nothing but reproduce itself year after year and century after century.31 Consequently, the whole social and spiritual order also seemed immutable. Land rent, before it became the sworn enemy of democracy, was long seen as the wellspring of social harmony, at least by those to whom it accrued.

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.

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.

In Africa, the outflow of capital has always exceeded the inflow of foreign aid by a wide margin. It is no doubt a good thing that several wealthy countries have launched judicial proceedings against former African leaders who fled their countries with ill-gotten gains. But it would be even more useful to establish international fiscal cooperation and data sharing to enable countries in Africa and elsewhere to root out such pillage in a more systematic and methodical fashion, especially since foreign companies and stockholders of all nationalities are at least as guilty as unscrupulous African elites. Once again, financial transparency and a progressive global tax on capital are the right answers.

In an inflationary spiral, everyone wants to make sure that the wages he receives and the prices he must pay evolve in a way that suits him. Such a spiral can be hard to stop. In France, the inflation rate exceeded 50 percent for four consecutive years, from 1945 to 1948.

It spares those who have already spent everything or invested everything in real economic assets (real estate or business capital), and, better still, it spares those who are in debt (inflation reduces nominal debt, which enables the indebted to get back on their feet more quickly and make new investments). In this idealized version, inflation is in a way a tax on idle capital and an encouragement to dynamic capital.

In the end, the truth is that inflation is a relatively crude and imprecise tool. Sometimes it redistributes wealth in the right direction, sometimes not. To be sure, if the choice is between a little more inflation and a little more austerity, inflation is no doubt preferable. But in France one sometimes hears the view that inflation is a nearly ideal tool for redistributing wealth (a way of taking money from “German rentiers” and forcing the aging population on the other side of the Rhine to show more solidarity with the rest of Europe).

One obvious problem with the gold standard was that the evolution of the overall price level depended primarily on the hazards of gold and silver discoveries. If the global stock of gold was static but global output increased, the price level had to fall (since the same money stock now had to support a larger volume of commercial exchange). In practice this was a source of considerable difficulty.17 If large deposits of gold or silver were suddenly discovered, as in Spanish America in the sixteenth and seventeenth centuries or California in the mid-nineteenth century, prices could skyrocket, which created other kinds of problems and brought undeserved windfalls to some.

Indeed, faith in the stabilizing role of central banking at times seems inversely proportional to faith in the social and fiscal policies that grew out of the same period. This is particularly clear in the monumental Monetary History of the United States published in 1963 by Milton Friedman and Anna Schwartz. In this fundamental work, the leading figure in monetary economics follows in minute detail the changes in United States monetary policy from 1857 to 1960, based on voluminous archival records.19 Unsurprisingly, the focal point of the book is the Great Depression. For Friedman, no doubt is possible: it was the unduly restrictive policy of the Federal Reserve that transformed the stock market crash into a credit crisis and plunged the economy into a deflationary spiral and a depression of unprecedented magnitude. The crisis was primarily monetary, and therefore its solution was also monetary. From this analysis, Friedman drew a clear political conclusion: in order to ensure regular, undisrupted growth in a capitalist economy, it is necessary and sufficient to make sure that monetary policy is designed to ensure steady growth of the money supply.

Central banks are powerful because they can redistribute wealth very quickly and, in theory, as extensively as they wish. If necessary, a central bank can create as many billions as it wants in seconds and credit all that cash to the account of a company or government in need. In an emergency (such as a financial panic, war, or natural disaster), this ability to create money immediately in unlimited amounts is an invaluable attribute. No tax authority can move that quickly to levy a tax: it is necessary first to establish a taxable base, set rates, pass a law, collect the tax, forestall possible challenges, and so on. If this were the only way to resolve a financial crisis, all the banks in the world would already be bankrupt. Rapid execution is the principal strength of the monetary authorities.

The problem with the current system is that multinational corporations often end up paying ridiculously small amounts because they can assign all their profits artificially to a subsidiary located in a place where taxes are very low; such a practice is not illegal, and in the minds of many corporate managers it is not even unethical.33 It makes more sense to give up the idea that profits can be pinned down to a particular state or territory; instead, one can apportion the revenues of the corporate tax on the basis of sales or wages paid within each country.

The general principle on which most tax systems are based is the principle of residence: each country taxes the income and wealth of individuals who reside within its borders for more than six months a year.

If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.

If we count assets owned by European households in tax havens, then Europe’s net asset position vis-à-vis the rest of the world becomes significantly positive: European households own the equivalent of all that there is to own in Europe plus a part of the rest of the world.

Growth can of course be encouraged by investing in education, knowledge, and nonpolluting technologies. But none of these will raise the growth rate to 4 or 5 percent a year. History shows that only countries that are catching up with more advanced economies—such as Europe during the three decades after World War II or China and other emerging countries today—can grow at such rates. For countries at the world technological frontier—and thus ultimately for the planet as a whole—there is ample reason to believe that the growth rate will not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted.

With an average return on capital of 4–5 percent, it is therefore likely that r > g will again become the norm in the twenty-first century, as it had been throughout history until the eve of World War I. In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital, thereby creating the illusion that the fundamental structural contradiction of capitalism (r > g) had been overcome.

I dislike the expression “economic science,” which strikes me as terribly arrogant because it suggests that economics has attained a higher scientific status than the other social sciences. I much prefer the expression “political economy,” which may seem rather old-fashioned but to my mind conveys the only thing that sets economics apart from the other social sciences: its political, normative, and moral purpose.

Social scientists, like all intellectuals and all citizens, ought to participate in public debate. They cannot be content to invoke grand but abstract principles such as justice, democracy, and world peace. They must make choices and take stands in regard to specific institutions and policies, whether it be the social state, the tax system, or the public debt. Everyone is political in his or her own way. The world is not divided between a political elite on one side and, on the other, an army of commentators and spectators whose only responsibility is to drop a ballot in a ballot box once every four or five years. It is illusory, I believe, to think that the scholar and the citizen live in separate moral universes, the former concerned with means and the latter with ends. Although comprehensible, this view ultimately strikes me as dangerous.

To be useful, economists must above all learn to be more pragmatic in their methodological choices, to make use of whatever tools are available, and thus to work more closely with other social science disciplines.

social scientists in other disciplines should not leave the study of economic facts to economists and must not flee in horror the minute a number rears its head, or content themselves with saying that every statistic is a social construct, which of course is true but insufficient.