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By Jean Pisani-Ferry, who holds the Tommaso Padoa Schioppa chair of the European University Institute in Florence and is a Senior Fellow at Bruegel, the European think tank. Originally published at Bruegel.
This piece was also published on www.piie.com
From the extraordinary wealth of its empirical material to the breadth of its cultural scope, and from the rare alliance of statistical precision and literary references to the level of its intellectual and political ambition, there is much to commend in this remarkable book.
From a policy standpoint, however, its last part, where the author offers an agenda to promote social fairness, deserves the most thorough discussion. It is much shorter but at least as ambitious as the analytical chapters.
Piketty’s goal there is to offer a new paradigm to substitute the largely obsolescent social-democratic project. This ambition may seem excessive. It is rather fundamentally right. In the current context of social anger, catalogues of down to earth policy proposals neither convince voters nor provide policymakers with a guide for real-time decision making in an unpredictable environment. Democracies nowadays need directions as ambitious as the welfare Keynesianism of the 1960s or the small government, free market project of the 1980s.
Purportedly realistic agendas, furthermore, often fail to tackle pressing challenges. Wealth inequality, income inequality, and inequality of access to essential goods such as education and healthcare have reached levels where they cannot be addressed by tweaks on the margin of the sort usually discussed in the policy debates.
Piketty’s bold agenda relies on three main pillars. The first is the empowerment of employees through a radical reform of corporate governance; the second is a massive redistribution of wealth and income through an overhaul of the tax system; the third, which essentially applies to Europe, is a move to transnational federalism. There are good reasons to contemplate each, but each is also highly problematic.
Empowering Employees Through Reform of Corporate Governance
First, corporate governance. A recurring theme of the book is a critique of the absolutism of property rights (what it calls proprietarisme). Piketty despises communism, but he considers the gradual extension of the sphere of private property (from land to manufactures, intangible capital, and data) and the parallel increase of shareholder power as capitalism’s main curse and a fundamental cause of the rise in inequality. Drawing on the German and Swedish experiences, he aims to restore a balance between capital owners and employees.
His proposals, however, go beyond the German codetermination, where employee representatives get half of the seats on the supervisory board while shareholders generally appoint the executive board, which in practice ensures that the latter retain control of decisions but provides employee representatives with good access to information and a say on the overall strategy. Piketty envisions more on two fronts: He advocates giving employees half of the seats on the board of large companies and capping the voting rights of shareholders holding more than 10 percent of a firm’s capital.
There is no reason not to contemplate pro-labor corporate governance reforms, especially in an economy where human capital matters more and more. What is striking in Piketty’s proposals, however, is that he envisages the issue from an almost exclusively distributional point of view. Whether or not his reforms would be conducive to social efficiency, spur innovation, or help to curb corporate short-termism seems largely outside his scope. Capitalism is looked at primarily as a wealth accumulation machinery, not as a driver of economic transformation.
Redistributing Wealth And Income Through Overhaul Of The Tax System
Taxation is the second instrument through which Piketty intends to contain the concentration of wealth and property. His proposals on this front are both precise and radical. Numerical benchmarks are presented as indicative, but the goal is unambiguous: to transform the nature of property to make it temporary rather than permanent. Piketty’s social utopia is explicitly akin to a land ownership regime where property is regularly redistributed from the landlords to the peasantry.
Three different progressive taxes are to be mobilized to this end: a wealth tax, an inheritance tax, and an income tax. The proceeds of the first two, about 5 percent of GDP, would finance a universal capital allocation whereby on her or his 25th birthday, every citizen would be endowed with 60 percent of the average wealth (or about $130,000 in advanced countries). The third one would yield about 40 percent of GDP and finance public goods, social insurance, and a basic income for the poor.
These numbers may not look that radical. Public spending amounts to 45 percent of GDP on average in the European Union, so the overall tax burden could remain roughly constant. However, the suggested parameters point to a fundamental overhaul of the property regime. Based on table 17.1 on page 1130 of the book, the annual tax rate on wealth could reach 5 percent for a person with net assets worth ten times the average wealth. Knowing that Piketty would (rightly) tax all forms of wealth equally and that average French household wealth amounts to €250,000, the tax on a €2.5 million wealth would be €125,000 annually. By comparison, for the United States, Senator Elizabeth Warren envisages only a 2 percent marginal tax rate on wealth above $50 million (instead of Piketty’s effective rate of 10 percent), reaching 3 percent above $1 billion (instead of more than 60 percent).
On top of that, the same assets would be liable to a 60 percent estate tax, and the effective tax rate on income would reach 60 percent for a person earning ten times the average income. Such levels would most likely eradicate property above a relatively low threshold, except for entrepreneurs able to achieve stellar returns on capital. Simulations by Emmanuel Saez and Gabriel Zucman (2019) on the 400 richest US individuals actually indicate that a 10 percent marginal wealth tax on assets above $1 billion would have prevented the trend deformation in the distribution of wealth observed since the 1980s. Piketty’s combination of a confiscatory wealth tax, a highly progressive estate tax, and a highly progressive income tax would go much farther. It would imply the end of capital ownership as we know it.
Again, there is nothing wrong about breaking taboos and considering fundamental capital ownership reform. But on the condition that repercussions are addressed. Piketty’s apparent disdain for the implications of his proposals is mind-boggling. He does not even bother discussing consequences for saving rates, investment behavior, or innovation. As for corporate governance, distribution seems to be his only lens. Whereas the repeated use of capital in the title of his books is an unmistakable reference to Karl Marx, Piketty shows almost no interest in the production side. Capital, for him, means little more than wealth.
Moving to Transnational Federalism in Europe
The third pillar, European federalism, is conceived as a way to overcome the policy constraints stemming from the distortions created by tax competition and the European Union’s unanimity rule on taxation matters (and, obliquely, from the eurozone’s fiscal discipline framework). To solve the stalemate resulting from the addition of veto powers within the EU Council (where each country is represented by its minister), he advocates democratizing the European Union and transferring taxation powers to a new assembly combining national and European parliamentarians.
The diagnosis is correct, but the solution is unlikely to see the light. The problem in Europe is not, as Piketty pretends to believe, the composition of the parliament. It arises from the much more fundamental fact that nations that have agreed to pool economic sovereignty in a range of fields are not ready to endow the European Union with competences for either taxes or wealth distribution. This has been their position since the origins, and the current political climate makes them even less sympathetic to such ideas than ever before.
Apart from the fact that an assembly combining national and European parliamentarians would probably not behave according to Piketty’s wishes, why would states suddenly agree to a fundamental change in the distribution of competences? In Germany, the question has become a constitutional matter. In a series of rulings, the Federal Constitutional Court has erected barriers to the transfer of new powers to the European Union. Ironically its argument is of the same nature as Piketty’s, but its conclusions are the opposite: For the Karlsruhe court, the European Union is not sufficiently democratic to be endowed with significant new competences, because the citizens of the country whose demographic weight is the strongest—Germany—are underrepresented in its institutional system.
On all three accounts—corporate governance, taxation, and European governance—Piketty’s proposals, therefore, raise many questions that he fails, or does not even attempt, to answer. Absent a systematic discussion of the implications of, and possible objections to, his ideas, they can hardly be regarded as serious policy proposals. In the end, what is deeply disturbing in his book is not the radicalism of his plans. It is the contrast between the thoroughness of his empirical analysis and his casual approach to policy issues.
1. The book is available only in French.
3. EU legislation results from “codecision” (joint approval) of the European Parliament and the Council of the European Union.