What can we do with what Thomas Piketty teaches us about capital in the twenty-first century?

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

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This post was written by Eric Toussaint