One of the more depressing features of Capital in the 21st Century is the air of inevitability attached to the much-discussed r > g inequality. This is exacerbated, on the whole, by the fact that Piketty’s proposed policy response, a progressive global tax on wealth, seems obviously utopian.
What about a much simpler alternative: increasing the rate of income tax applied to the very rich, and removing preferential treatment of capital income? Piketty’s own work with Saez yields the conclusion that the socially optimal top marginal rate of taxation, after taking account of incentive effects, would be 70 per cent or more. Such rates prevailed, at least nominally, in the mid-20th century, without obvious ill effects. Again, Piketty provides the relevant evidence.
So, is there something about a globalised world economy that renders a return to high marginal rates of taxation impossible?
One crucial objection has been tested and refuted. Over the course of the 20th century, numerous small countries and some larger ones (notably Switzerland) established themselves as tax havens, willing to accept bank deposits and other capital flows from citizens of other countries and shield them from the efforts of the governments of those countries to collect taxes, or penalise tax evasion. Given the benefits of being a tax haven, it seemed likely that some jurisdictions would simply reject any attempt at an international effort to combat tax evasion.
The OECD put this proposition to the test when, in 2000, it listed a number of jurisdictions, such as Andorra and Liechtenstein as un-cooperative tax havens, because they declined to implement proposed standards of transparency and exchange of information. All of these jurisdictions ultimately capitulated and were “whitelisted”. The label “tax haven”, once sought-after, is now repudiated by all governments, however keen they may be to attract and retain hot money.
Even more symbolically important has been the end of Switzerland’s famous (or notorious) system of bank secrecy, as a result of agreements signed with the EU and other national governments over the past year. Under these agreements, the parties will automatically exchange information on the financial accounts of each other’s residents.
A bigger problem, central to Piketty’s larger concerns, is the deeply ingrained criminality of the financial sector, including participation in tax evasion. Despite repeated exposure, the big banks have got away with financial penalties that have barely dented their earnings and with occasional criminal charges against underlings. As long as major international banks retain their immunity from any kind of effective punishment, they will continue to facilitate both aggressive tax avoidance and criminal tax evasion. The ‘too big to jail’ list over the last year or so includes HSBC, Deutsche Bank and Credit Suisse, but others, like UBS, are even worse.
But with something like $200 billion in penalties levied over the past five years alone, the excuses are wearing thin, as is the theatre of ritual wrist-slapping. “Too big to jail” has become a public scandal so notorious that sooner or later, someone will be forced to act, and actually put one of these recidivists into receivership. That implies, breaking up their operations, sacking the entire management and wiping out the shareholders. With a few examples, “pour encourager les autres”, we might see some actual changes in behavior.
Corporate taxation presents some more difficult problems. National governments, such as those of Singapore and Ireland, have proved much more protective of corporate tax dodgers than of individuals. Resistance to measures to combat tax avoidance has been correspondingly stronger. Still, the OECD is slowly grinding its way through measures to combat BEPS (Base Erosion and Profit Shifting), its unlovely acronym for an array of corporate devices including transfer pricing and abuse of tax treaties. At some point, perhaps, the secrecy achieved through webs of shell companies may become as obsolete as numbered Swiss bank accounts.
A more serious objection is that, rather than notionally shifting their money, wealthy individuals and corporations might physically shift themselves and their productive activities to low-tax jurisdictions. On the whole, this problem does not look to be too severe. For example, despite a very attractive tax regime, and easy proximity to European capitals, the Channel Islands have not attracted English tax-dodgers in the numbers that might be expected. As regards corporations, the capacity to move is limited by economic realities. Whatever their organizational structure, companies like Apple and Google must generate their revenue, and their economic profit, in markets with large numbers of consumers. If the conduits they have used to shift that profit to tax havens are shut down, they have little choice but to pay up.
Finally, there’s the question of political practicality. For those whose views were formed by the tax revolts of the 1970s and 1980s, and by the capitalist triumphalism of the 1990s, substantial increases in tax rates, even for the very wealthy, are simply unthinkable. This is the intellectual background for the great majority of the political class, including the notional left, in most developed countries. But those days are fading into the past. The surprising success of Capital in the Twenty-First Century is one among many indications of an appetite for change.