What can we do with what Thomas Piketty teaches us about capital in the twenty-first century?
Sun 25th May 2014
The soon to be published Capital in the Twenty-First Century |1 is an indispensable book for anyone interested in learning more about the unequal distribution of wealth in the world today. As I read this major 950-page study, which is supplemented by a large amount of statistical data and tables available on Internet |2|), it became blindingly obvious that the Occupy Wall Street movement is completely right to target the richest 1%.
Indeed, in 2013, in France the wealthiest 1% owned 25% of the total wealth, |3 30% in the United Kingdom, 20% in Sweden, and 32% in the United States. |4 If we include the portion of wealth that is hidden in tax havens or in other ways, that percentage would increase by at least 2 or 3 points. To simplify, the wealthiest 1% represents the capitalist class that possesses an impressive amount of the total wealth. |5|
If we increase that number to the richest 10%, we arrive at the following percentages: in France, the wealthiest 10% own 60% of the wealth; in the UK, 70%; in Sweden, 60%; and in the US, 70%. Overall, we can consider that the additional 9% represent the circle or allies –in the broad sense of the term—of the capitalist class.
Popular movements should make precise claims in terms of the measures that should be taken with respect to the richest 1% and the next 9%. The amount of tangible and intangible assets that this 10% possesses reveals to what extent wealth is unequally distributed. It also shows where a left-wing government could find the necessary resources in great abundance for implementing policies that would 1) improve the living conditions of most people, and 2) bring about the profound structural changes needed to move beyond productivist capitalism, and launch the ecological transition process.
In a compelling table, Piketty sums up the share of wealth owned by the richest 10%, the next 40%, and the poorest 50%.
Table 1. The unequal ownership of capital in Europe and the United States |6|
|Share of different groups in the total amount of wealth||Europe 2010||United States 2010|
|(richest 1% alone)||25%||35%|
|The poorest 50%||5%||5%|
50% of the population in Northern countries owns but 5% of the total wealth. When the left argues for a tax on wealth, this is obviously an important figure to mention in favour of not taxing the poorest 50%. Meanwhile, the middle 40% in Piketty’s model, who own 35% of the total wealth in Continental Western Europe, and 25% in the US and the UK, are mainly employees, even if a small percentage are self-employed.
If we go from percentages to amounts in euros, we can understand even better what it means when we say that wealth is concentrated in a very small fraction of the population.
An idea of wealth according to different groups
According to Piketty, in several European countries where the standard of living is close to the French standard, the average wealth of the poorest 50% is about €20,000; however, the fact that many of these households have no wealth or are in debt is also an important consideration.
The middle 40% have an average personal wealth of €175,000 (ranging from €100,000 to €400,000). The next 9% have €800,000, and the upper 1% owns €5 million. Of course, at the top of this 1%, there are super-wealthy individuals like Liliane Bettencourt, |7 who is worth more than €20 billion.
From the unequal distribution of private wealth in the European Union to its necessary redistribution
It is worth analysing the case of the European Union, which in 2013 had a GDP of €14,700 billion. |8 The total private wealth of European households amounted to approximately €70,000 billion. The richest 1% had €17,500 billion |9 (25% of €70,000 billion). The next 9% owned €24,500 billion (35%), as did the middle 40%. The remaining 50% had €3,500 billion or 5% of the total. |10
The annual budget of the European commission (€145 billion) is equivalent to approximately 1% of the EU’s GDP. Meanwhile, a 1% annual tax on the wealth of the richest Europeans would raise €175 billion (€30 billion more than the annual budget). How about a 5% wealth tax? This simple illustration gives a concrete example of what is potentially achievable, if social movements can succeed in obtaining radical change in European policies or even of the policies in only one EU country. |11
An exceptional tax of 33% (i.e., once in the lifetime of a generation) on the wealth of the richest 1% in the EU would raise nearly €6,000 billion (i.e., 40 times the annual EU budget!). Imagine the result of a confiscatory rate of 80%?
These examples help us to size up the issues at stake in terms of taxing the private wealth of the capitalist class and the possibilities that exist for coming up with propositions so that we can find money where it is plentiful, in order to put it to use to bring about social justice.
Many economists keep repeating that it is of no use to tax the wealthiest, because as there are so few of them the amount raised would not be very significant. On the contrary, Piketty shows that the richest 1% has concentrated such a phenomenal amount of tangible and intangible assets that a tax policy targeting the richest 1%, 2.5%, or even 10% would provide substantial means for breaking with neoliberalism. |12
To those who claim that wealth is inaccessible, because it can cross borders easily, we must respond that sequestration, the freezing of financial assets, heavy fines, and the control of capital movements are powerful tools that could be applied if there is the public will and political determination.
The unequal distribution of private wealth throughout the world
What has just been said about the European Union could be extended to the rest of the world, because from the North to the South there has been a substantial increase in the personal wealth of the richest.
We could also focus on an even smaller minority of wealthy individuals as Piketty does: In 1987, there were 150 people in the 1/20,000,000 richest part of the adult population worldwide, with an average personal fortune of $1.5 billion. |13 Twenty-six years later, in 2013, the 1/20,000,000 richest part of the population numbered 225 people with an average personal fortune of $15 billion, which represents a 6.4% increase per year. |14 The .1% (1/1000 of the world population |15|) richest in the world own 20% of the wealth in the world, the richest 1% own 50%. If we take into account the wealth of the richest 10%, Piketty estimates that it holds 80% to 90% of the total world wealth, while the poorest 50% certainly have less than 5%. |16 These figures allow us to understand just how much redistribution must take place, and that this redistribution would require the confiscation of a very significant share of the personal wealth owned by the richest.
Piketty observes that the wealth of the richest 1/1000 on the planet increased by a rate of 6% per year in recent decades, whereas the wealth of the overall population increased by only 2%. If a radical shift does not occur, and all else remains the same, in 30 years, the .1% will own 60% of total world wealth, three times the 20% they possessed in 2013! |17
The distribution of income is also extremely unequal
Piketty also analyses labour income, and shows that the 10% who earn the most take home 25% of the income from labour in Europe, and 35% in the United States.
Table 2. Total labour income inequality |18|
|Share of different groups in total labour income||Europe 2010||United States 2010|
|The richest 10%||25%||35%|
|(richest 1% alone)||7%||12%|
|The poorest 50%||30%||25%|
If we add labour income and other forms of income (rent, interest on savings, corporate profits, dividends, and so on), the distribution is even more unequal, as shown in Table 3.
Table 3. Total inequality of income from labour and capital |19|
|Share of different groups in total income||Europe 2010||United States 2010|
|The richest 10%||35%||50%|
|(richest 1% alone)||10%||20%|
|The poorest 50%||25%||20%|
The evolution of wealth inequalities over the last two centuries
In France just before the Revolution of 1789, the proportion of national wealth held by the richest 10% was about 90%, and the fraction possessed by the richest 1% was as much as 60%. |20 After the Revolution, the proportion held by the richest 10% fell slightly due to the redistribution of land belonging to the aristocracy and clergy in favour of the bourgeoisie (a little over 9%).
Concerning the lion’s share possessed by the richest 1% in 1789, Piketty underlines that the denunciation of the 1% by Occupy Wall Street combined with the proclamation “We are the 99%” is somewhat reminiscent of the famous pamphlet “Qu’est-ce que le tiers état?”(“What is the Third Estate”) published in January 1789 by Abbot Sieyès. |21|
Piketty has created a graph showing the evolution of the share possessed by the richest 10% and 1% between 1810 and 2010. He groups together the principal European countries in the category “Europe,” and presents the United States separately.
In Europe, the proportion of national wealth held by the richest 10% was equivalent to more than 80% in 1810, and rose during the 19th century and early 20th century, reaching 90% in 1910. It then started to fall because of World War I and the concessions that the bourgeoisie were obliged to make in the face of the class struggles that followed 1914-1918. |22 The decrease continued after World War II for the same reasons and the share possessed by the richest 10% reached its lowest point in 1975 (slightly less than 60%). After that, it started to rise again, reaching nearly 65% in 2010. The share of the richest 1% followed the same general trend, going from a little over 50% in 1810 to just over 60% in 1910. It started to fall in 1910, and reached its lowest point in 1970-1975 (20%) then started to go up again. In the United States, the evolution followed the same chronological pattern, but it is important to underline that whereas the share possessed by the richest 1% and 10% was less than that of their European counterparts in the 19th century, this situation changed as of the 1960s: today their slice of the cake is now greater than that of their European counterparts.
There are two obvious conclusions: 1.The trend is toward greater inequality, with a significant increase in the wealth held by the richest 1% and 10%; 2.The evolution of wealth distribution can be rigorously explained by the evolution of social struggles and power relations between different classes.
Piketty sums up the reasons that led to the reduction in the proportion of wealth possessed by the richest groups between World War I and 1970, and those that subsequently caused it to rise again: “To sum up: the shocks of the “first twentieth century” (1914-1945) – that is to say World War I, the Bolshevik revolution of 1917, the 1929 financial crisis, World War II, and the new policies of regulation, taxation and public control of capital that arose from those upheavals – led to historically low levels of private capital during the 1950s and 1960s. The wealth reconstitution processes appeared very quickly, then accelerated with the American-British conservative revolution of 1979-1980, the collapse of the Soviet bloc in 1989-1990, the financial globalisation and deregulation of the 1990s and 2000s, an event that marked a political watershed, reversing the previous trend, and giving holders of private capital in the early 2010s, despite the financial crisis that started in 2007-2008, levels of prosperity unknown since 1913.” |23|
It is clear that the world wars produced both profound popular resentment against the capitalist class, and were followed by major social struggles, which in several countries took the form of revolutionary crises. The 1929 financial crisis also resulted in radicalisation and significant social struggles (particularly in the United States). Those in power had to make concessions to popular demands. We shall see below, for example, the actions that were taken by the governments of the main countries after World War I and II with regard to taxation, influencing to various degrees the proportion of wealth and income appropriated by the richest 1%. We then observe, as from the offensive triggered by the capitalist class against the working classes during the 1970s and 1980s, |24 a radical change in the policies of those governments, particularly with regard to taxation.
To measure the evolution of wealth, |25 Piketty compares it to national income |26 “At the start of the 1970s, the total value of private wealth – net of debt – was between two and three-and-a-half years’ worth of national income in all rich countries, on all continents. Forty years later, at the start of the 2010s, private wealth represents between four and seven years of national income, |27 again in all the countries studied. There can be no doubt about the general trend: aside from the financial bubbles, we have witnessed the large-scale return of private capital in rich countries since the 1970s, or rather the emergence of a new form of wealth-based capitalism.” |28|
We also observe that public wealth has considerably decreased in the last 40 years, after having increased in several countries, particularly after World War II. In France, the government nationalised the Bank of France in 1945 together with the four largest deposit banks, the Crédit Lyonnais, Société Générale, National Bank for Trade and Industry, and Comptoir national d’escompte de Paris. Louis Renault, head of the Renault car company, was arrested in September 1944 for his collaboration under the Nazi occupation, and the company was nationalised in January 1945. |29 The British government nationalised the Bank of England in 1946. According to Piketty, in the industrial and financial sectors, in France, “the State’s share of national wealth exceeded 50% from the 1950s to the 1970s.” |30|
As Piketty also writes, we have observed: “… on the one hand, a movement of privatisation and gradual transfer of public wealth towards private wealth since the 1970s and 1980s; and on the other hand, a phenomenon of long-term adjustment of the prices of real estate and financial assets, which also accelerated in the 1980s and 1990s, in a political context globally very favourable to private wealth, in comparison with the decades immediately after the war.” |31 This second phenomenon is clearly connected with the financialisation of the economy.
Evolution of low and high salaries since the 1960s
We do not have room to sum up the evolution of income inequalities over the last two centuries. We shall limit ourselves to highlighting the evolution in France since 1968. The May 1968 general strike in France, and the Grenelle accords that followed it, led to a considerable increase in the minimum wage over 15 years: “That is how the buying power of the minimum wage rose in all by more than 130% between 1968 and 1983, while at the same time average wages increased by only about 50%, hence a very considerable compression in wage inequalities. The break with the previous period was clear and massive: the buying power of the minimum wage had risen by barely 25% between 1950 and 1968.” |32
The turning point occurred in 1982-1983 when François Mitterrand’s government veered to the right. In a context of stagnating wages, the highest salaries, those of the richest 1%, rose by 30% between the end of the 1990s and 2010, and those of the richest 0.1 % increased by 50%. |33
On the other side of the Atlantic, a legal minimum wage was introduced in 1933 at the start of the Franklin D. Roosevelt’s presidency, 20 years before France. It reached its peak in 1969 (under Lyndon Johnson) when it was the equivalent of $10 per hour at 2013 prices. Since then, it has fallen, and in 2013 under Barack Obama, it was barely $7.25 an hour. |34 Also in the United States, with regard to all sources of income (wages, rent, profits, dividends, etc.), we observe that from 1977 to 2007, the richest 10% appropriated three quarters of the increase in national income; the richest 1% absorbing 60%. For the remaining 90%, growth has been less than 0.5% per annum. |35
If we take into account the distribution of national income in several key countries, we observe everywhere over the course of the last decades that the richest 1% and 0.1% have increased their share.
Proportion of national income going to the richest 1% in 2010: United States approximately 20%, Canada and UK 14-15%, Germany 11%, Australia 9-10%, Japan + France + Spain + Italy 9%, Sweden + Denmark 7%. |36
Proportion of national income going to the richest 0.1 %: during the 1970s, US 2%, France and Japan 1.5%; in 2010, US 10% (12% if we include capital gain on shares), France and Japan 2.5%. |37
Let us examine several so-called emerging countries for which Piketty was able to gather reliable data. |38 Proportion of national income going to the richest 1%: China 4-5% in 1980, and 10-11% in 2010; India 4% in 1980, and 12% in 2010; Argentina 10% in 1970, and 18% in 2010; Colombia 18% in 2000, and 20% in 2010.
The interest of this data, apart from concerning a central aspect of the description of inequalities, is that we can demonstrate that the evolution of income is really linked to social struggles and the politics of the governments in power. This is one more reason for stating that collective action is the key for improving wages, in particular the lowest, and for reducing inequalities. Action is decisive for shaping government decisions and gaining concessions from employers.
The evolution of tax rates is also linked to social struggles
In France, whereas in 1914 the top tax rate on the highest income brackets was just 2%, it rose to 50% in 1920, 60% in 1924, and even 72% in 1925. In 1920, the decision to apply a sudden and very sharp increase was taken by a National Assembly with a right-wing majority that was afraid of the general strike and radicalisation that could have ensued due to a refusal to make concessions. In Germany, it went from 3% (1891-1914) to 40% in 1919-1920 at the height of the revolutionary crisis. In the US, it progressed from 8% before the 1914-18 war to 77% after the war. |39
We see the same evolution with regard to inheritance tax rates. Legislators have imposed very high rates in response to popular pressure. This began just after 1914-18 and continued after the financial crisis in the 1930s. While the highest rate in France was just 6.5% before the war (in practice, it was reduced to 1%), it shot up to 30%. In Germany, it went from 0% before the war to 35% afterwards. In the United States, inheritance tax reached 70% in 1937-1939. |40 The rate of tax on inheritance is important and considered vital by the richest 10%, because 60-70% of major fortunes are inherited. |41|
Returning to the top income tax rate. Just before the crisis of October 1929, President Hoover cut the top rate to 25%. In 1933, Roosevelt notched it up to 63% in the first year of his presidency, then to 79% in 1937 (thus exceeding the 70% applied after 1919), then to 88% in 1942, and finally to 94% in 1944. The top rate remained at 90% until the mid-1960s. In his 1972 presidential campaign, the Democratic candidate George McGovern proposed to raise the top income tax rate to 100%, |42 but Nixon won the election. The rate fell progressively to 70% in the early 1980s. Ronald Reagan then lowered it to 60%. In the late 1980s, it dropped to 40%, then under George W. Bush to 35%. Over the period 1932-1980, the average top rate was 81% (to which should be added the 5% to 10% in state tax).
France and Germany applied top rates between 50% and 70% from the 1940s to 1980s. In the UK, the top rate reached 98% in the 1940s, and then again during the 1970s. |43|
Finally, we should note that the top rate applies in practice to the incomes of the richest 1% of the population.
The radical reduction in the top rates, particularly in the US and UK since the 1980s, has led to a major increase in the salaries of senior business executives and in the proportion of national income and wealth held by the richest 1%. |44|
After having reviewed the evolution of taxes on the highest incomes, Piketty concludes that a very high top rate is needed, more than 80% (82% to be exact) to be applied above $500,000 or $1 million; |45 50% or 60% for incomes above $200,000. |46|
Piketty recognises that this will not be easy to obtain in the current context. In the United States, Congress acts largely in favour of the 1%. And with good reason: according to a serious estimate, the average wealth of the members of the US Congress stood at $15 million in 2012. |47|
Once again, the results of Piketty’s research show that a combination of two decisive actions is required. |48
1. a broad-based information and training campaign to spread as much as possible the lessons of twentieth century history about how taxation policies have been directly influenced by the pressure of popular movements;
2. mobilisation within the framework of a platform to pursue a group of priority objectives.
This review first appeared on the CADTM website http://cadtm.org/What-can-we-do-with-what-Thomas