Capital in the Twenty-First Century

The two main challenges facing 21st century liberal democracy are rising income inequality and the exponential growth of wealth inequality. To deal with the former, higher progressive income taxes are required. To deal with the latter, Piketty proposes an international progressive tax on capital. This, as he says, would “stop the indefinite increase of inequality of wealth, and […] impose effective regulation on the financial and banking system to avoid crises” (667). On the first point, even a modest tax would limit the accumulation of astronomical fortunes since the very largest fortunes would pay the most and their capacity to make concomitantly vast returns would be tempered. Further, as the revenue from the tax could be redistributed (for instance, to help developing nations adapt to climate change) it would also raise the living standards of the poorest.

On the second point, more effective regulation could be achieved by the necessary transparency required for such a tax. As all wealth owners would, legally, have to declare their assets, governments and organisations would, for the first time, have “reliable information about the evolution of global wealth” (667). This would allow for a more informed democratic debate about wealth. It would also give governments a clearer picture of the world economy and allow them to react more pro-actively to potential crises.

Moreover, this type of tax is preferable to the alternatives. The main one presently being “a defensive reaction of a nationalist stripe” (664) which economically translates to a “resort to protectionism and controls on capital” (691). Such policies were attempted by US President Donald Trump from 2017 to 2021, just four years after Capital in the Twenty-First Century was published. They involved putting tariffs on the import of foreign goods, ostensibly to protect domestic industries, and stricter controls on immigration. As witnessed during the Trump administration, these policies had several drawbacks. Aside from stoking international tensions, they typically led to retaliation. This happened most notably in 2018 when China imposed retaliatory tariffs on US goods and entered a “trade war.” In the long run, as Piketty highlights, when all nations are drawn into increasing protectionism, it leaves everybody worse off. The best products no longer have equal access to markets, and inferior goods are promoted.

A capital tax is then the most effective response to the problems created by globalization. It is also the most efficient response to the current debt crisis of the developed nations. Austerity, the approach practiced at present, is less efficient due to “the obvious contractionary effect of budgetary rigor” (707). In other words, since government spending cuts also harm economic growth and recovery, they result in smaller government tax revenues. This means the debt takes longer to clear. In contrast, a one-off flat tax of fifteen percent on private capital would eliminate the public debt overnight by bringing in a year’s worth of national income.

The main stumbling block is (as with increases in income tax) political. As Piketty says, “A global tax on capital would require a very high and no doubt unrealistic level of international co-operation” (664). This is because for a tax on capital to work it must be implemented by all, or most, nations. Otherwise, individuals would simply move their wealth to countries which were not imposing the tax. Indeed, it is precisely this form of tax competition which has led to the “race to the bottom” of corporate tax rates that we now see today. It is also an example of what economists call the “prisoner’s dilemma,” a situation in which it is in everyone’s interest to act cooperatively, but one party can still act independently to achieve a better outcome at the expense of others.

It is obviously no easy task getting all nations to agree. Rivalries, suspicions, and nationalistic self-interest often make far less ambitious agreements, even between a handful of countries, difficult (witness the glacial pace of international action on climate change, or the wrangling over nuclear disarmament or EU fishing rights). Nevertheless, nations could move towards an international capital tax incrementally. For example, the EU or BRICS (Brazil, Russia, India, China, and South Africa) could begin by negotiating a tax within their respective blocs and experimenting with implantation and enforcement. They could then progress more easily towards agreement with each other. Of course, this meet ideological opposition from wealthy elites and their backers. And as Piketty points out, such ingrained “ideological obstacles” (722) from thirty years of neo-liberalism, “will take some time to overcome” (722). Still, it is an ideal worth fighting for.