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At the heart of every major political upheaval lies a fiscal revolution.
For example, a detailed study of French taxes in 2010, which looked at all forms of taxation, found that the overall rate of taxation (47 percent of national income on average) broke down as follows. The bottom 50 percent of the income distribution pay a rate of 40–45 percent; the next 40 percent pay 45–50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent.
In France, the 1914 income tax law provided for a top rate of just 2 percent, which applied to only a tiny minority of taxpayers.
Particularly striking is the fact that the crucial law of June 25, 1920, which raised the top rate to 50 percent and can actually be seen as a second coming of the income tax,
In the United States, which was intellectually and politically more prepared than any other country to accept a steeply progressive income tax and would lead the movement in the interwar period, it was again not until 1918–1919 that the top rate was abruptly increased, first to 67 and then to 77 percent. In Britain, the top rate was set at 8 percent in 1909, a fairly high level for the time, but again it was not until after the war that it was suddenly raised to more than 40 percent.
17 Revolutionary lawmakers, hostile to the inquisitorial methods of the fallen monarchy and probably keen as well to protect the emerging industrial bourgeoisie from bearing too heavy a tax burden, chose to institute an “indicial” tax system: taxes were calculated on the basis of indices that were supposed to reflect the taxpayer’s ability to pay rather than actual income, which did not have to be declared. For instance, the “door and window tax” was based on the number of doors and windows in the taxpayer’s primary residence, which was taken to be an index of wealth.
In particular, France and Germany had top rates between 50 and 70 percent from the late 1940s until the 1980s, but never as high as 80–90 percent. The only exception was Germany in 1947–1949, when the rate was 90 percent. But this was a time when the tax schedule was fixed by the occupying powers (in practice, the US authorities). As soon as Germany regained fiscal sovereignty in 1950, the country quickly returned to rates more in keeping with its traditions, and the top rate fell within a few years to just over 50 percent (see Figure 14.1). We see exactly
the same phenomenon in Japan.31
In the 1950s and 1960s, executives in British and US firms had little reason to fight for such raises, and other interested parties were less inclined to accept them, because 80–90 percent of the increase would in any case go directly to the government.
observed increase in very high salaries. According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.
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.
A Global Tax on Capital: A Useful Utopia
Take, for example, the Cypriot banking crisis of 2013. Neither the European authorities nor the IMF had much information about who exactly owned the financial assets deposited in Cyprus or what amounts they owned, hence their proposed solutions proved crude and ineffective.
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
For example, a flat tax of 15 percent on private wealth would yield nearly a year’s worth of national income and thus allow for immediate reimbursement of all outstanding public debt.
It takes decades to accumulate capital; it can also take a very long time to reduce a debt.
Over the course of this period, British taxpayers spent more on interest on the debt than on education.
Very likely they do not have much information themselves, for the simple reason that they have never equipped themselves with the tools they need to move forward on this issue, even though it is absolutely central. Such opacity is not conducive to a considered and rational resolution of this sort of conflict. The problem is that the Cypriot banks no longer have the money that appears on
their balance sheets. Apparently, they invested it in Greek bonds that were since written down and in real estate that is now worthless. Naturally, European authorities are hesitant to use the money of European taxpayers to keep the Cypriot banks afloat without some kind of guarantees in return, especially since in the end what they will really be keeping afloat is Russian millionaires.
was vigorously rejected by the people of Cyprus.
This episode is interesting because it illustrates the limits of the central banks and financial authorities.
The usual answer to this question is that the creation of the euro—agreed on in the 1992 Maastricht Treaty in the wake of the fall of the Berlin Wall and the reunification of Germany and made a reality on January 1, 2002, when automatic teller machines across the Eurozone first began to dispense euro notes—is but one step in a lengthy process.
It settled on this institutional arrangement in the late 1980s and early 1990s, at a time when many people believed that the only function of central banking was to control inflation. The “stagflation” of the 1970s had convinced governments and people that central banks ought to be independent of political control and target low inflation as their only objective. That is why Europe created a currency without a state and a central bank without a government. The crisis of 2008 shattered this static vision of central banking, as it became apparent that in
a serious economic crisis central banks have a crucial role to play and that the existing European institutions were wholly unsuited to the task at hand.
The maximal level of capital is attained when so much has been accumulated that the return on capital, r, supposed to be equal to its marginal productivity, falls to be equal to the growth rate g. In 1961 Edmund Phelps baptized the equality r = g the “golden rule of capital accumulation.”
The Stern Report, published in 2006, calculated that the potential damage to the environment by the end of the century could amount, in some scenarios, to dozens of points of global GDP per
year. Among economists, the controversy surrounding the report hinged mainly on the question of the rate at which future damage to the environment should be discounted. Nicholas Stern, who is British, argued for a relatively low discount rate, approximately the same as the growth rate (1–1.5 percent a year).
The key practical issue is the following. Suppose that Stern is approximately correct that there is good reason to spend the equivalent of 5 percent of global GDP annually to ward off an environmental catastrophe.
The Central Contradiction of Capitalism: r > g
