Chapter 15 -- A Global Tax on Capital

Thomas Piketty, Capital in the 21st Century (Harvard University Press 2014)

Patrick Toche

This set of slides surveys selected topics from Capital in the Twenty-First Century, a book written by economist Thomas Piketty, published in English in 2014 to great acclaim.
All source files for this course are available for download by anyone without restrictions at https://github.com/ptoche/piketty
The full course is expected to be completed by April 2015.
Chapter 14 examined the structure of taxation.
Chapter 15 makes the case for a global tax on capital.

Policies to preserve the welfare state:
- 1. financial transparency and international cooperation
- 2. a global and progressive tax on capital
Progressive taxation — the greater the base, the greater the tax rate
The challenge of a global tax on capital:
- 1. a tax schedule applicable to global wealth
- 2. rules to apportion revenues
- 3. democratic support
This Utopia could start with information sharing between the United States and the European Union.

The tax base would be 'net wealth', the market value of financial and non-financial assets — bank deposits, stocks, bonds, partnerships, equity in listed and unlisted firms, patents, real estate — net of debt.
A progressive tax schedule:
- 1% on net assets between €1M and €5M
- 2% on net assets above €5M
A more progressive tax schedule:
- 1% on net assets between €1M and €5M
- 2% on net assets between €5M and €1B
- 5% on net assets above €1B
- 10% on net assets above €10B

Objectives:
- 1. reduce inequality of wealth
- 2. regulate the financial and banking system
- 3. set rules for valuing assets, liabilities, and net wealth
- 4. share financial and banking data
Some European countries tax wealth — France, Switzerland, Spain, and until recently Germany and Sweden — but these taxes are riddled with exemptions and asset values are too far from market values.
Existing taxes on wealth are based on gross wealth — a heavily indebted person is taxed in the same way as a person with no debt.

With existing tax loopholes, rich individuals and large corporations essentially "set their own taxes".
The amount of wealth hidden in tax havens is staggering.
Tax havens defend bank secrecy because their clients evade taxes, not because privacy is valued per se.
Free trade and a welfare state are inconsistent with tax havens.
The first step towards the regulation of banking and financial markets is the automatic transmission of banking data across countries.
Free trade in goods, services, and capital requires international exchange of financial information.

Since 2015, the Foreign Account Tax Compliance Act (FATCA) requires all foreign banks to inform the United States Treasury Department about bank accounts and investments held abroad by US taxpayers.
FATCA remains insufficient:
- Sanctions are small — a 30% surtax on income that noncompliant banks derive from their US operations.
- While large banks that need to do business in the US comply with FACTA, smaller banks specialize in "non compliance" — a profitable niche as long as business with US financial institutions is small.

The 2003 European Union Savings Directive (EUSD) required the automatic exchange of information between member states on private savings income, and introduced a 'witholding tax' to be deducted from interest earned by European Union residents on investments made in another member state.
The 2003/48/EC directive concerned only interest-bearing deposit accounts — with large fortunes held in equity consequently exempted.
In 2016, directive 2014/107/EU extended the scope of directive 2003/48/EC to include interest, dividends and other types of income.
Andorra, Austria, Liechtenstein, Luxembourg, Monaco, San Marino, and Switzerland to be included, with temporary delays and exemptions.

1. A progressive tax on net wealth is fair:
- Income is not a well-defined concept at the very top.
- Liliane Bettencourt, the L'Oréal heiress whose wealth is €30B, has never declared annual income above €5M. Even a 100% income tax achieves little redistribution.
- One solution is to expand the income tax base to include income held in trusts, holding companies, and partnerships. Another solution is to tax wealth rather than income.
- Since return on wealth is increasing in wealth, a progressive tax offsets this inequity, and is more 'fair' than a flat tax.

An inheritance tax can be high, because it is collected only once a generation. Figure 14.1 shows the top marginal rate on inheritance exceeded 60% between 1940 and 1980 in both the US and UK.
But the average rate cannot be too high — if it were set at 50%, nearly all wealth would be taxed after 2 generations.
It makes more sense to tax heirs incrementally throughout their lives (income, profit, wealth taxes), rather than once and for all at the time of inheritance (the estate tax).
A progressive tax on capital would reassert control over capitalism, while preserving the efficiency of private property and competition.
Each type of capital would be taxed in the same way.

A progressive, annual tax on wealth, even at modest rates, could generate large tax revenues.
Because on average wealth is worth more than 5 years of GDP and, in the top centiles, even more.
An EU-wide wealth tax of 1% on €1M-€5M and 2% above €5M would affect 2.5% of the population and raise revenue of 2% of EU GDP.
In 2012, Italy introduced a tax on wealth — a 0.8% flat rate on real estate and 0.1% flat rate on bank deposits and other financial assets ... except stocks! The overall rate was ... regressive and led to electoral defeat!
It is difficult for one country alone to impose a wealth tax, it mut be a coordinated effort.

The geographic distribution of natural resources and especially of oil rents depends on country borders. In the middle east, these were arbitrarily drawn by occupying powers.
- Saudi Arabia — population 20M — have annual production 12M barrels per day (approx 100 litres), an annual revenue of \$438B at \$100 per barrel — equivalent to \$22,000 per person, and half that at \$50 per barrel.
- Qatar — population 300,000 — have 2M barrels per day, an annual revenue of \$73B at \$100 per barrel — equivalent to \$243,000 per person, and half that at \$50 per barrel.

Immigration shares the economic benefits of free trade and globalization, and reduces inequality.
In the United States, immigration has been a key force behind wealth distribution: population rose from 3M in 1776 to 320M in 2016, largely thanks to successive waves of immigration.
The less developed countries would benefit most from a transparent international tax system.
In Africa, the outflow of capital exceeds the inflow of foreign aid!