Geert de Clercq
French economist Thomas Piketty has long fed global debate about income inequality and called for supertaxes on the rich. Now he has the ear of French presidential challenger Francois Hollande, who plans to apply his advice if elected.
Hollande, a Socialist running strongly against President Nicolas Sarkozy, has made waves in France and beyond with a plan to tax all income over E1 million (R10.3m) a year at 75 percent.
His proposal comes in an international context of protests against a rising wealth gap in Western countries by the “occupy” and “ indignados” movements, a US election campaign focused on taxation and the debt crisis besetting euro zone governments.
Frontrunner in polls ahead of Sunday’s first round of voting, Hollande is the first mainstream politician in a big industrial country to propose such drastic tax hikes for the rich.
The 40-year-old Piketty, seeing a welcome historical parallel with the US response to the Great Depression of the 1930s, said Hollande might be “the next Roosevelt”.
Hollande’s plan was directly inspired by the economist, who although not a member of the Socialist Party has influenced Hollande and has debated with him and his top advisers.
“We need to listen closely to Piketty, because his analysis of the situation is correct – notably that taxation in France is the opposite of what it should be: the more money you make the less tax you pay,” Hollande’s top economic adviser Michel Sapin, a former finance minister, said.
A longtime friend of the candidate and a possible finance minister in a left-wing government, Sapin said this did not mean Hollande would incorporate all the economist’s proposals. But on the essential points they agree, Hollande’s 75 percent tax even goes further than the 60 percent Piketty recommended.
The two also agree on a plan to reform the entire French tax system, though Piketty said in an interview that Hollande might struggle to get that legislation through.
Piketty’s studies show that 30 years of falling tax levels have widened income inequality in many countries, particularly the US, back to levels last seen in the 1920s.
“Hollande’s 75 percent tax plan is the right response to the occupy movement.
“The irony is that the street movement is happening in the US, while the political response is coming in France,” he said at the Paris School of Economics, where he teaches.
The muted political response in the US to protest on American streets, he argued, may be because wealthy Americans have successfully co-opted their country’s political process.
Yet, Piketty said “confiscatory” taxes were not a European but an originally US invention, under president Franklin Roosevelt, who raised marginal tax rates to more than 70 percent in 1936 and to more than 90 percent during World War II.
That US example was emulated by Britain and continental Europe, where, in the postwar years, top tax brackets remained at similar confiscatory levels until the late 1970s.
“It looks like France and Hollande are arriving a bit ahead of the others this time,” Piketty said of moves on the eastern side of the Atlantic. “Hollande could be the next Roosevelt.”
If Hollande, riding on Piketty’s ideas, does succeed the conservative Sarkozy next month, that could send waves across the ocean, as taxation is also shaping up to be a major issue in the US campaign for November’s presidential election.
US President Barack Obama, like Roosevelt a Democrat, has pushed for a minimum 30 percent effective tax rate on millionaire earners, known as the Buffett Rule for the support billionaire investor Warren Buffett has given to raising taxes on the rich. The president’s likely Republican challenger, Mitt Romney, who if elected would be one of the richest men ever to live in the White House, wants to slash all US tax rates by 20 percent.
Piketty studied mathematics and economics in Paris and at the London School of Economics, gaining his doctorate at only 22, before moving to the Massachusetts Institute of Technology. There he discovered the work of Simon Kuznets, a pioneer of the study of national income accounts. But Kuznets, whose work won the 1971 Nobel prize in economics, had covered only the US and his research was never updated.
Putting together national income accounts and income tax data, Piketty published his first long-term income inequality charts for France in 2001. With French colleague Emmanuel Saez, now a professor at the University of California, he used the same methodology in a 2003 study of US inequality.
Another American Nobel prize-winning economist, 2008 laureate Paul Krugman, has called their work “the gold standard for research on income inequality”. Piketty and Saez are often quoted in US media, including in a front-page account of their influence on US political thinking in Tuesday’s New York Times.
With Tony Atkinson of Britain and several other economists, Piketty and colleagues have built a World Top Incomes Database that covers about 25 countries and is available on the internet.
Their findings challenge Kuznets’ conclusion that income inequality in developed economies would decrease once a certain level of income is achieved, known as the Kuznets curve. While this held largely true during Kuznets’ lifetime, he died in 1985, inequality has spiked since the early 1980s.
Piketty and Saez’s studies show that in the US, the share of total income going to the top 10 percent of earners remained stable at about 33 percent from 1949 to 1980, then grew quickly to reach 50 percent in 2007. Even in France, the land of égalité, disparities are wide.
In 2010, the 50 percent of French people with the lowest incomes earned on average E1 500 gross an adult a month, or 27 percent of national income, while the top 10 percent earned E8 600 an adult or 31 percent of the total.
The top 1 percent, about 500 000 people, earned E30 000 a month or 11 percent of national income. Wealth is even more unevenly distributed.
The bottom half of the French adult population had assets of E14 000 on average, owning just 4 percent of all wealth. The richest 10 percent had assets of E1.1m an adult or 62 percent of the total. The top 1 percent had assets of E4.4m a person, or 24 percent of all wealth in France.
This pattern of wealth distribution is similar to most west European countries, but the imbalance is more extreme in the US, where the wealthiest 10 percent of citizens own 72 percent of national assets and the poorest 50 percent together account for just 2 percent, the studies show.
Piketty argues that this kind of inequality is a threat to social stability, as new protest movements show, and that higher taxes are the best way to redistribute income.
Rich countries with higher inequality levels, such as the US and Britain, have not seen above-average economic growth over the past 30 years, Piketty argues, dismissing the notion that high taxes would make the most talented people flee the country.
While the idea of a 75 percent marginal tax is popular in France – 61 percent of voters approve, according to a TNS Sofres/Mediaprism poll – Hollande’s proposal has been widely criticised at home and abroad. – Reuters