Thomas Piketty: why we need a radical new wealth tax
The bestselling French economist talks to the FT's European economics commentator Martin Sandbu about ideology, capital, and how to make societies fairer with taxes on wealth and inheritance
Produced by James Sandy; Filmed by Nicola Stansfield
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MARTIN SANDBU: A few years ago, the economist Thomas Piketty became a world celebrity with his book Capital In The 21st Century, a book which actually became the best selling economics book of the 21st century. So far, his new book Capital And Ideology is now available in English in the bookshops. Thomas Piketty is here to talk to the FT about the book. Welcome.
The previous book really put inequality on the map. Here you talk about ideology, and how it shapes what you call inequality regimes, and how inequality in turn shapes ideology. Give us a glimpse of the argument.
THOMAS PIKETTY: Well, the novelty of this book as compared to the previous one is that in the previous one, I was very much [INAUDIBLE] on the experience of Western countries, in particular Western Europe and North America during the 20th century. And the World War I, World War II contributed to a big reduction of inequality. Here, I take a much broader comparative and international perspective.
I look at India, I look at Brazil, I look at South Africa, China, Latin America. And this allows me, I think, to better understand how over time, or over a long period of time, you see major transformation of the structure of inequality in various countries. And the main driving force, I think, he's not so much a violent destructions for war, or economic deterministic forces, or technological or control forces.
But rather, the changing ideology and the changing political mobilisation about inequality. So you see countries in history, we choose to be very unequal in their organisation of property relation, think Sweden, which we know view as a very egalitarian. Country but between 1865 and 1911, you had actually voting rights that belonged first only to the top 20% of the population.
But within these top 20%, you could have between 1 or 100 voting rights, depending on the level of your property and tax. And in several dozen municipal elections, you could actually have one individual, one alone more than 50% of the vote, including the prime minister of the time. And you know, if you had told someone in Sweden in 1910 that this was going to become a very egalitarian country, the old political system was organised very differently.
And there are many other national trajectories, examples of countries that they describe in the movie. You know, just changing the structure of inequality. In India, during the period of colonisation, and how independent India tried to develop the positive discrimination in order to reverse some of these very strong inequalities toward the formerly discriminated lower caste of society.
So lots of examples showing that there's nothing natural in the way social and economic inequalities are organised in any given place. It really depends on the imagination of societies, and also the ability of the different sort of narratives on inequality to win the day, through mobilizations, through the political platform. And I think it would be the same in the future.
MARTIN SANDBU: It's kind of an interesting evolution from our previous book, which I think left some readers with a bit of fatalism, in the sense said that there was-- some of the measures seem to be there. There are some very strong material forces at work here that makes inequality-- there's a strong tendency towards widening inequalities.
In this perspective on ideas, and in some sense I think more optimistic that if you change enough people's imagination, as you put it, things can change in the material economy very quickly. When you look at the global perspective, do you find that these changes in ideas have global reach? What happens in one place also happens somewhere else? Or these idiosyncratic to different countries?
THOMAS PIKETTY: Well, sometimes you have a very quick diffusion of ideas. So if you think of the rise of progressive taxation of income and wealth around World War I, and in the interwar period, it's very striking to see these very fast diffusion of ideas. So until 1914, no country would dare the top income tax rate, or top inheritance tax rate above 10% or 20%. And then suddenly, in the interwar period, having 60%, 70%, 80% on very large income, or very large ones, becomes almost the norm.
Following the US, which has been a leader in the development of progressive taxation in the interwar period, open to Reagan basically. Up until 1980. And then--
MARTIN SANDBU: Introduced an income tax in 1915, something like that?
THOMAS PIKETTY: 1913 in the US. So it was actually before the war. It's interesting that in the case of the US, it was peaceful social mobilisation that took more than 20 years because they had to change a federal constitution in order to make the possibility of a federal income tax constitutional.
In France, you have to wait until World War I. Its really the summer of 1914.
MARTIN SANDBU: So the war helps.
THOMAS PIKETTY: Yeah, well this is in the case of Francis, this is very, very sad story. Is it's only to pay for the war with Germany, and finally the political decision is taken to create an income tax. Before that, the French political elite would say OK, France we had the French Revolution. So that's enough. We already are a country of equals.
So we are not like aristocratic Britain, also we die in Prussia. And that's also an interesting example of how sometimes the elites tend to instrumentalize their own national history in order to preserve--
MARTIN SANDBU: It's a function of ideology, as you describe it.
THOMAS PIKETTY: Yeah, sometimes it's to protect your own interests. But I tried to take this set of ideas seriously, because there are always more than just pure hypocrisy. There is some hypocrisy sometimes. But it's usually, they always have some grain of plausibility.
MARTIN SANDBU: People drink their own Kool-Aid.
THOMAS PIKETTY: Yeah, it's a--
MARTIN SANDBU: Especially if they paid for it. We have to take these ideas. We always have to take them seriously if we want to go beyond them, and then move to a different inequality regime. It almost sounds from the book that if it's the ideas that change, and that's what drives it, it actually sticks more.
Because you mentioned that Germany didn't have very high tax rate for very long. It was basically on the Western occupation. So I mean, it seems like when the ideas change, you actually get more lasting change.
THOMAS PIKETTY: That's right. So in the case of Germany, there are also ideas that actually change and work quite well, which is the whole idea of co-management. You have workers' rights in the board of companies. And so this was created in the 1950s, where in large corporation in Germany, you have half of the seats in the board of large companies, which go to a worker representative elected by workers.
Those I'll go to shareholders. So shareholders actually have half of the seats plus one. So after this, you vote. But if workers in addition to the 50% of the vote as workers, own 10% of the share, 20% of the share of the company. Or even some local government, regional government which sometimes happen in Germany, own 10% or 20% of the share, then you can have a change in the controlling measure of the company, in spite of the fact that some private shareholder has 80% of the shares.
So you can see that these enormous legal transformation as compared to the one share, one vote view of private property, and private corporation. And this is an example of an innovation that actually not spread too much. You know, progressive taxation was an example where you have large international diffusion. Here it has sort have remained a specificity of Germany, and Sweden, and Nordic countries.
But until the present day, they did not really spread in Britain, in US, actually in France, in my own country you still stick very much to the one share, one vote principle. I think this could change in the future because in the end, these German Nordic system of co-management worked pretty well.
MARTIN SANDBU: It's quite successful.
THOMAS PIKETTY: Yeah, in getting workers to be more involved in the long-term investment strategy of the firm. And I think this is something that is now discussed, including in the US by Warren and Sanders, of introducing more workers' rights in the board of US companies. And I think these could be, if this was adopted in the US, in Britain in French, there could be a well diffusion of these also model of corporate governance going on. And this would be a pretty major change.
MARTIN SANDBU: So more broadly, what is the state of play in terms of ideology today? It does feel like everyone's sort of looking for a new direction.
THOMAS PIKETTY: Yes, I think we live at a time of great uncertainty, because the ideology of globalisation and financial deregulation, as it has developed in the 1980s, is now at a time of crisis. So first of all, in the US and the UK, where there was Reagan sort of made the claims that we will get more growth, more innovation, by relying on more free market--
MARTIN SANDBU: And the government is the problem, yeah.
THOMAS PIKETTY: But 30 years later, in fact US workers have not truly seen the growth. And if anything, the growth rate in the US has been divided by 2, following the Reagan decade. You know, between 1990 and 2020, the 30-year period, you only have 1.1% in per capita national income in the US, which is twice as less as between 1950 and 1990.
So the claim that by reducing top income tax rate, and actually dividing them by two, you will stimulate more innovation and growth, these could have been true. This could have been true. But that's not what we've seen.
And I think this is way today, basically you have two possible reaction to that. You have a sort of the Trump, or in a way a Brexit discourse, which is to say, OK, we're going to limit the competition from foreign workers. We have got to limit the flow of people, the flow of immigration.
Built a wall with Mexico, and protect yourself from your foreign competition. And in the UK, you add a little bit of that with Polish workers and stubs of free circulation of the people. Now there's another way, which I think of trying to regulate the circulation of people, to regulate more of circulation of capital, or at least to try to.
If you want to have free capital flow going on, I think you need to have in exchange a more equitable tax system for large corporations, for large wealth holders, income holders. So now, in between you could have business as usual. You don't want to regulate more labour. You don't want to regulate more capital. But I don't think this is really an option.
MARTIN SANDBU: Doesn't seem sustainable. And you, of course, participate. You don't just analyse this, but you participate, and you're in that second camp, arguing for more progressive taxation. You also talk about shared power in corporations.
We've already mentioned that. But tell us about your wealth tax proposal. Because in the book it comes it comes out as pretty draconian. You have tax rates going up to 90% in a proposal.
THOMAS PIKETTY: Yes, actually this has been done in the past, actually. It is exceptional wealth taxes. For instance, after World War II in Germany or Japan, in order to reduce very large public debt of the time, there was progressive tax up to 90% and very large wealth spots for you.
And these worked pretty well, because it allowed these two countries, Germany and, Japan to reduce very fast their public debt, and then to invest in public infrastructure, education in the '50s, '60s. And I think this was a large success. Now, it depends, of course, on the level of wealth at which you do that.
You know, if you tax 90% someone who owns the entire world, you know, you would still own 10% of the world, which is a lot. So it's all-- we have to discuss. So to put concrete numbers, I use in the proposal, I use the proceeds of the annual wealth tax, and of the tax entirely to finance a system of inheritance for all, where everybody at age 25 would receive 120,000 euros.
Now in your system proposal, people will now receive 0, would receive 120,000. This is about--
MARTIN SANDBU: As a one-off payment at age 25.
THOMAS PIKETTY: Age 25.
MARTIN SANDBU: Like a one-off universal basic income.
THOMAS PIKETTY: Like inheritance. And so people who used to receive zero will receive 120,000. That's about half of the population would receive close to zero. People today would receive 1 million after the tax everything, they would receive 620,000.
So you know, this is not complete equality. And if you want my opinion, I think we could go further than that. But I think what's important is that poor children, or children of the middle class, and the lower middle class also have good ideas to create firm. And you can also buy an apartment.
And I think property is also a way to change the power structure in society. And to give more bargaining power to people so that they can better choose which job, and which wage, to accept. And this is a way to allow more people to participate in the economy in a way where you can make plans.
And I think this is really what we need. I think the level of inequality we have today is not only unfair, but it's so not efficient for the working of our economy, where we live in very educated societies, and we need you know broad participation by a very large group.
And the ideology that we see as today that more concentrated power, and more concentrated ownership is always good. And no matter what the number of zeros for the millionaire, who else, it's always-- we should always keep it like that, I think is not convincing.
MARTIN SANDBU: So what do you say to those who say well, we regret that wealth is so concentrated. But your sort of proposal is so confiscatory that it completely removes the incentive for accumulation, and that will be bad for productivity and growth. And in the end, what'll hurt even those who tried to help? That is the standard counter argument? What's your answer?
THOMAS PIKETTY: As I was saying, someone was about to inherit 1 million, will still inherited 620,000. So why is it that some people should inherit 10 times, 100 times more than others. All children have good ideas in life to make project, and I think we have to think about these.
And the view that because you've made a fortune, say at age 30, you should keep all the decision making power at age 50, 70, 90, I think corresponds to a sort of monarchical view of the working, of modern economy and modern corporations that is really at odds with the reality.
Today, we have a lot more billionaire and much wealthier billionaire in the US, and in the world than what we had in the '70s or '80s. But in terms of productivity growth, we actually don't-- we have billionaires everywhere except in growth statistics.
So people say we have more innovation because we have more patents, but yes. OK, maybe people put their patents and they put their name everywhere, including on [INAUDIBLE] they did not invent themselves. But if this were real innovation, you should see it in productivity, and in output growth, and the growth of income and wages. And we've not seen that in the past 30 years. So--
MARTIN SANDBU: It's clear that we have seen higher taxes with higher productivity growth in the past. But one final question about this. I mean, in the past you've advocated an international wealth tax. Could this be done by a single country? Because it's somewhat utopian to think that everyone has to do it at once. Is it possible to pursue your sort of programme, very steep wealth taxation, for one country to start with?
THOMAS PIKETTY: Well, you have to rethink the way you organise the movement of capital and capital controls. This is what I was saying earlier about control of individual labour flow, or control of capital. You have to do something, I think, about the capital. So take for instance the proposals that have been made in the US by Warren and Sanders to introduce a billionaire tax up to 6%, 8% per year of tax payment.
MARTIN SANDBU: Depending on those cases.
THOMAS PIKETTY: What they both add to this is the fact that if you want to go away with your wealth, well first as long as you are a US citizen, even if you go away, you pay the tax. Now, if you really want to go away, and give up US citizenship, and bring your wealth to Switzerland, what Warren and Sanders are saying is OK, you can do that.
But you will pay an exit tax of 40%. Right? So you leave on 40% of your wealth. Now, the US federal government as a capability to enforce that, which will not be the case of any government in the world. So clearly there is an asymmetry in the state capacities. So that doesn't mean that smaller governments cannot do anything.
But clearly they have to think other about maybe they cannot have a tax that is as progressive as in the US. But what this illustrates is that there are still things you can do without waiting for you know the UN Adopting a wealth tax.
MARTIN SANDBU: But even in an era of globalisation, national power hasn't actually been exhausted.
THOMAS PIKETTY: No, you can do a lot. And if you think of co-management that we referred to before. Germany and Sweden didn't wait for the UN to adopt [? good ?] management to apply it. And this has worked pretty well. So the view that nation states cannot do anything anymore, I think he's wrong.
Now, sometimes they need to take tough unilateral actions in order to step aside a little bit of the legal framework of free capital flows that we've seen in the past. So when you have an exit tax of 40%, you're not exactly that free capital flow world of before.
Or actually, when Obama in 2010 threatened Switzerland that they would lose their banking licence if they don't change our legislation about bank secrecy, we are not quite just free capital flow, you do what you want, kind of setting that that actually was almost constitutionalized in Europe. That's a problem with Europe, is that if France and Germany were telling Luxembourg, we're going to take away your banking licence if you don't transmit information of our taxpayer in Luxembourg, then in fact Luxembourg could sue France and Germany with a court of justice in Luxembourg, saying we're looking into the Maastricht Treaty.
It never say that we have to give you this information. It says that capital can flow with no counterpart of any kind. So now what do we do? Do we wait for another Obama to solve the problem of Europe, with Switzerland and Luxembourg? Or do we, at some point, accept the idea that OK, we made mistakes in the way we wrote the Maastricht Treaty, and the treaties around globalisation in general in the '80s, '90s.
But we are not going to wait for Luxembourg book to agree to changes. So at some point, you need some unilateral departure to propose a new treaty. But if Luxembourg doesn't accept, you have to put sanctions. And in the end, this is politics. This cannot just be legal treaties, you made a mistake in the past, therefore we're going to stick with it for an over 50 years.
So that's the difficult but where we are today. But if you don't do this kind of departure from the current organisation of globalisation, then you end up with nativist parties who are going to propose and those are kind of departure, which is basically to be very tough with migrants. Because that's easier than being tough with Google, or with rich people.
But in the end, this nativist departure is much more frightening a scene for globalisation. And in addition, is not going to solve the problem of rising inequality. It's not going to solve the problem of global warming. So we have to choose between different options. And business as usual I think is not an option.
MARTIN SANDBU: A provocative contribution to the raging battle of ideas. Thomas Piketty, thank you very much for talking to the FT.
THOMAS PIKETTY: Thank you.