Capital in the Twenty-First Century (98 page)

A related problem arises in connection with the tax on individual capital. The general
principle on which most tax systems are based is the principle of residence: each
country taxes the income and wealth of individuals who reside within its borders for
more than six months a year. This principle is increasingly difficult to apply in
Europe, especially in border areas (for example, along the Franco-Belgian border).
What is more, wealth has always been taxed partly as a function of the location of
the asset rather than of its owner. For example, the owner of a Paris apartment must
pay property tax to the city of Paris, even if he lives halfway around the world and
regardless of his nationality. The same principle applies to the wealth tax, but only
in regard to real estate. There is no reason why it could not also be applied to financial
assets, based on the location of the corresponding business activity or company. The
same is true for government bonds. Extending the principle of “residence of the capital
asset” (rather than of its owner) to financial assets would obviously require automatic
sharing of bank data to allow the tax authorities to assess complex ownership structures.
Such a tax would also raise the issue of multinationality.
³⁴
Adequate answers to all these questions can clearly be found only at the European
(or global) level. The right approach is therefore to create a Eurozone budgetary
parliament to deal with them.

Are all these proposals utopian? No more so than attempting to create a stateless
currency. When countries relinquish monetary sovereignty, it is essential to restore
their fiscal sovereignty over matters no longer within the purview of the nation-state,
such as the interest rate on public debt, the progressive tax on capital, or the taxation
of multinational corporations. For the countries of Europe, the priority now should
be to construct a continental political authority capable of reasserting control over
patrimonial capitalism and private interests and of advancing the European social
model in the twenty-first century. The minor disparities between national social models
are of secondary importance in view of the challenges to the very survival of the
common European model.
³⁵

Another point to bear in mind is that without such a European political union, it
is highly likely that tax competition will continue to wreak havoc. The race to the
bottom continues in regard to corporate taxes, as recently proposed “allowances for
corporate equity” show.
³⁶
It is important to realize that tax competition regularly leads to a reliance on
consumption taxes, that is, to the kind of tax system that existed in the nineteenth
century, where no progressivity is possible. In practice, this favors individuals
who are able to save, to change their country of residence, or both.
³⁷
Note, however, that progress toward some forms of fiscal cooperation has been more
rapid than one might imagine at first glance: consider, for example, the proposed
financial transactions tax, which could become one of the first truly European taxes.
Although such a tax is far less significant than a tax on capital or corporate profits
(in terms of both revenues and distributive impact), recent progress on this tax shows
that nothing is foreordained.
³⁸
Political and fiscal history always blaze their own trails.

Let me now take a step back from the immediate issues of European construction and
raise the following question: In an ideal society, what level of public debt is desirable?
Let me say at once that there is no certainty about the answer, and only democratic
deliberation can decide, in keeping with the goals each society sets for itself and
the particular challenges each country faces. What is certain is that no sensible
answer is possible unless a broader question is also raised: What level of public
capital is desirable, and what is the ideal level of total national capital?

In this book, I have looked in considerable detail at the evolution of the capital/income
ratio
β
across space and time. I have also examined how
β
is determined in the long run by the savings and growth rates of each country, according
to the law
β
=
s
/
g
. But I have not yet asked what
β
is desirable. In an ideal society, should the capital stock be equal to five years
of national income, or ten years, or twenty? How should we think about this question?
It is impossible to give a precise answer. Under certain hypotheses, however, one
can establish a ceiling on the quantity of capital that one can envision accumulating
a priori. The maximal level of capital is attained when so much has been accumulated
that the return on capital,
r
, supposed to be equal to its marginal productivity, falls to be equal to the growth
rate
g
. In 1961 Edmund Phelps baptized the equality
r
=
g
the “golden rule of capital accumulation.” If one takes it literally, the golden
rule implies much higher capital/income ratios than have been observed historically,
since, as I have shown, the return on capital has always been significantly higher
than the growth rate. Indeed,
r
was much greater than
g
before the nineteenth century (with a return on capital of 4–5 percent and a growth
rate below 1 percent), and it will probably be so again in the twenty-first century
(with a return of 4–5 percent once again and long-term growth not much above 1.5 percent).
³⁹
It is very difficult to say what quantity of capital would have to be accumulated
for the rate of return to fall to 1 or 1.5 percent. It is surely far more than the
six to seven years of national income currently observed in the most capital-intensive
countries. Perhaps it would take ten to fifteen years of national income, maybe even
more. It is even harder to imagine what it would take for the return on capital to
fall to the low growth levels observed before the eighteenth century (less than 0.2
percent). One might need to accumulate capital equivalent to twenty to thirty years
of national income: everyone would then own so much real estate, machinery, tools,
and so on that an additional unit of capital would add less than 0.2 percent to each
year’s output.

The truth is that to pose the question in this way is to approach it too abstractly.
The answer given by the golden rule is not very useful in practice. It is unlikely
that any human society will ever accumulate that much capital. Nevertheless, the logic
that underlies the golden rule is not without interest. Let me summarize the argument
briefly.
⁴⁰
If the golden rule is satisfied, so
r
=
g
, then by definition capital’s long-run share of national income is exactly equal
to the savings rate:
α
=
s
. Conversely, as long as
r
>
g
, capital’s long-run share is greater than the savings rate:
α
>
s
.
⁴¹
In other words, in order for the golden rule to be satisfied, one has to have accumulated
so much capital that capital no longer yields anything. Or, more precisely, one has
to have accumulated so much capital that merely maintaining the capital stock at the
same level (in proportion to national income) requires reinvesting all of the return
to capital every year. That is what
α
=
s
means: all of the return to capital must be saved and added back to the capital stock.
Conversely, if
r
>
g
, than capital returns something in the long run, in the sense that it is no longer
necessary to reinvest all of the return on capital to maintain the same capital/income
ratio.

Clearly, then, the golden rule is related to a “capital saturation” strategy. So much
capital is accumulated that rentiers have nothing left to consume, since they must
reinvest all of their return if they want their capital to grow at the same rate as
the economy, thereby preserving their social status relative to the average for the
society. Conversely, if
r
>
g
, it suffices to reinvest a fraction of the return on capital equal to the growth
rate (
g
) and to consume the rest (
r
−
g
). The inequality
r
>
g is the basis of a society of rentiers. Accumulating enough capital to reduce the
return to the growth rate can therefore end the reign of the rentier.

But is it the best way to achieve that end? Why would the owners of capital, or society
as a whole, choose to accumulate that much capital? Bear in mind that the argument
that leads to the golden rule simply sets an upper limit but in no way justifies reaching
it.
⁴²
In practice, there are much simpler and more effective ways to deal with rentiers,
namely, by taxing them: no need to accumulate capital worth dozens of years of national
income, which might require several generations to forgo consumption.
⁴³
At a purely theoretical level, everything depends in principle on the origins of
growth. If there is no productivity growth, so that the only source of growth is demographic,
then accumulating capital to the level required by the golden rule might make sense.
For example, if one assumes that the population will grow forever at 1 percent a year
and that people are infinitely patient and altruistic toward future generations, then
the right way to maximize per capita consumption in the long run is to accumulate
so much capital that the rate of return falls to 1 percent. But the limits of this
argument are obvious. In the first place, it is rather odd to assume that demographic
growth is eternal, since it depends on the reproductive choices of future generations,
for which the present generation is not responsible (unless we imagine a world with
a particularly underdeveloped contraceptive technology). Furthermore, if demographic
growth is also zero, one would have to accumulate an infinite quantity of capital:
as long as the return on capital is even slightly positive, it will be in the interest
of future generations for the present generation to consume nothing and accumulate
as much as possible. According to Marx, who implicitly assumes zero demographic and
productivity growth, this is the ultimate consequence of the capitalist’s unlimited
desire to accumulate more and more capital, and in the end it leads to the downfall
of capitalism and the collective appropriation of the means of production. Indeed,
in the Soviet Union, the state claimed to serve the common good by accumulating unlimited
industrial capital and ever-increasing numbers of machines: no one really knew where
the planners thought accumulation should end.
⁴⁴

If productivity growth is even slightly positive, the process of capital accumulation
is described by the law
β
=
s
/
g
. The question of the social optimum then becomes more difficult to resolve. If one
knows in advance that productivity will increase forever by 1 percent a year, it follows
that future generations will be more productive and prosperous than present ones.
That being the case, is it reasonable to sacrifice present consumption to the accumulation
of vast amounts of capital? Depending on how one chooses to compare and weigh the
well-being of different generations, one can reach any desired conclusion: that it
is wiser to leave nothing at all for future generations (except perhaps our pollution),
or to abide by the golden rule, or any other split between present and future consumption
between those two extremes. Clearly, the golden rule is of limited practical utility.
⁴⁵

In truth, simple common sense should have been enough to conclude that no mathematical
formula will enable us to resolve the complex issue of deciding how much to leave
for future generations. Why, then, did I feel it necessary to present these conceptual
debates around the golden rule? Because they have had a certain impact on public debate
in recent years in regard first to European deficits and second to controversies around
the issue of climate change.

First, a rather different idea of “the golden rule” has figured in the European debate
about public deficits.
⁴⁶
In 1992, when the Treaty of Maastricht created the euro, it was stipulated that member
states should ensure that their budget deficits would be less than 3 percent of GDP
and that total public debt would remain below 60 percent of GDP.
⁴⁷
The precise economic logic behind these choices has never been completely explained.
⁴⁸
Indeed, if one does not include public assets and total national capital, it is difficult
to justify any particular level of public debt on rational grounds. I have already
mentioned the real reason for these strict budgetary constraints, which are historically
unprecedented. (The United States, Britain, and Japan have never imposed such rules
on themselves.) It is an almost inevitable consequence of the decision to create a
common currency without a state, and in particular without pooling the debt of member
states or coordinating deficits. Presumably, the Maastricht criteria would become
unnecessary if the Eurozone were to equip itself with a budgetary parliament empowered
to decide and coordinate deficit levels for the various member states. The decision
would then be a sovereign and democratic one. There is no convincing reason to impose
a priori constraints, much less to enshrine limits on debts and deficits in state
constitutions. Since the construction of a budgetary union has only just begun, of
course, special rules may be necessary to build confidence: for example, one can imagine
requiring a parliamentary supermajority in order to exceed a certain level of debt.
But there is no justification for engraving untouchable debt and deficit limits in
stone in order to thwart future political majorities.