Committee for the Abolition of Illegitimate Debt

Indeed, in 2013, in France the wealthiest 1% owned 25% of the total wealth, [3] 30% in the United Kingdom, 20% in Sweden, and 32% in the United States. [4] If we include the portion of wealth that is hidden in tax havens or in other ways, that percentage would increase by at least 2 or 3 points. To simplify, the wealthiest 1% represents the capitalist class that possesses an impressive amount of the total wealth. [5]

If we increase that number to the richest 10%, we arrive at the following percentages: in France, the wealthiest 10% own 60% of the wealth; in the UK, 70%; in Sweden, 60%; and in the US, 70%. Overall, we can consider that the additional 9% represent the circle or allies –in the broad sense of the term—of the capitalist class.

Popular movements should make precise claims in terms of the measures that should be taken with respect to the richest 1% and the next 9%. The amount of tangible and intangible assets that this 10% possesses reveals to what extent wealth is unequally distributed. It also shows where a left-wing government could find the necessary resources in great abundance for implementing policies that would 1) improve the living conditions of most people, and 2) bring about the profound structural changes needed to move beyond productivist capitalism, and launch the ecological transition process.

In a compelling table, Piketty sums up the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of wealth owned by the richest 10%, the next 40%, and the poorest 50%.

Table 1. The unequal ownership of capital in Europe and the United States [6]

50% of the population in Northern countries owns but 5% of the total wealth. When the left argues for a tax on wealth, this is obviously an important figure to mention in favour of not taxing the poorest 50%. Meanwhile, the middle 40% in Piketty’s model, who own 35% of the total wealth in Continental Western Europe, and 25% in the US and the UK, are mainly employees, even if a small percentage are self-employed.

If we go from percentages to amounts in euros, we can understand even better what it means when we say that wealth is concentrated in a very small fraction of the population.

An idea of wealth according to different groups

According to Piketty, in several European countries where the standard of living is close to the French standard, the average wealth of the poorest 50% is about €20,000; however, the fact that many of these households have no wealth or are in debt is also an important consideration.

The middle 40% have an average personal wealth of €175,000 (ranging from €100,000 to €400,000). The next 9% have €800,000, and the upper 1% owns €5 million. Of course, at the top of this 1%, there are super-wealthy individuals like Liliane Bettencourt, [7] who is worth more than €20 billion.

From the unequal distribution of private wealth in the European Union to its necessary redistribution

It is worth analysing the case of the European Union, which in 2013 had a GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. of €14,700 billion. [8] The total private wealth of European households amounted to approximately €70,000 billion. The richest 1% had €17,500 billion [9] (25% of €70,000 billion). The next 9% owned €24,500 billion (35%), as did the middle 40%. The remaining 50% had €3,500 billion or 5% of the total. [10]

The annual budget of the European commission (€145 billion) is equivalent to approximately 1% of the EU’s GDP. Meanwhile, a 1% annual tax on the wealth of the richest Europeans would raise €175 billion (€30 billion more than the annual budget). How about a 5% wealth tax? This simple illustration gives a concrete example of what is potentially achievable, if social movements can succeed in obtaining radical change in European policies or even of the policies in only one EU country. [11]

An exceptional tax of 33% (i.e., once in the lifetime of a generation) on the wealth of the richest 1% in the EU would raise nearly €6,000 billion (i.e., 40 times the annual EU budget!). Imagine the result of a confiscatory rate of 80%?

These examples help us to size up the issues at stake in terms of taxing the private wealth of the capitalist class and the possibilities that exist for coming up with propositions so that we can find money where it is plentiful, in order to put it to use to bring about social justice.

Many economists keep repeating that it is of no use to tax the wealthiest, because as there are so few of them the amount raised would not be very significant. On the contrary, Piketty shows that the richest 1% has concentrated such a phenomenal amount of tangible and intangible assets that a tax policy targeting the richest 1%, 2.5%, or even 10% would provide substantial means for breaking with neoliberalism. [12]

To those who claim that wealth is inaccessible, because it can cross borders easily, we must respond that sequestration, the freezing of financial assets, heavy fines, and the control of capital movements are powerful tools that could be applied if there is the public will and political determination.

The unequal distribution of private wealth throughout the world

What has just been said about the European Union could be extended to the rest of the world, because from the North to the South there has been a substantial increase in the personal wealth of the richest.

We could also focus on an even smaller minority of wealthy individuals as Piketty does: In 1987, there were 150 people in the 1/20,000,000 richest part of the adult population worldwide, with an average personal fortune of $1.5 billion. [13] Twenty-six years later, in 2013, the 1/20,000,000 richest part of the population numbered 225 people with an average personal fortune of $15 billion, which represents a 6.4% increase per year. [14] The .1% (1/1000 of the world population [15]) richest in the world own 20% of the wealth in the world, the richest 1% own 50%. If we take into account the wealth of the richest 10%, Piketty estimates that it holds 80% to 90% of the total world wealth, while the poorest 50% certainly have less than 5%. [16] These figures allow us to understand just how much redistribution must take place, and that this redistribution would require the confiscation of a very significant share of the personal wealth owned by the richest.

Piketty observes that the wealth of the richest 1/1000 on the planet increased by a rate of 6% per year in recent decades, whereas the wealth of the overall population increased by only 2%. If a radical shift does not occur, and all else remains the same, in 30 years, the .1% will own 60% of total world wealth, three times the 20% they possessed in 2013! [17]

The distribution of income is also extremely unequal

Piketty also analyses labour income, and shows that the 10% who earn the most take home 25% of the income from labour in Europe, and 35% in the United States.

Table 2. Total labour income inequality [18]

If we add labour income and other forms of income (rent, interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. on savings, corporate profits, dividends, and so on), the distribution is even more unequal, as shown in Table 3.

Table 3. Total inequality of income from labour and capital [19]

The evolution of wealth inequalities over the last two centuries

In France just before the Revolution of 1789, the proportion of national wealth held by the richest 10% was about 90%, and the fraction possessed by the richest 1% was as much as 60%. [20] After the Revolution, the proportion held by the richest 10% fell slightly due to the redistribution of land belonging to the aristocracy and clergy in favour of the bourgeoisie (a little over 9%).

Concerning the lion’s share possessed by the richest 1% in 1789, Piketty underlines that the denunciation of the 1% by Occupy Wall Street combined with the proclamation “We are the 99%” is somewhat reminiscent of the famous pamphlet “Qu’est-ce que le tiers état?”(“What is the Third Estate”) published in January 1789 by Abbot Sieyès. [21]

Piketty has created a graph showing the evolution of the share possessed by the richest 10% and 1% between 1810 and 2010. He groups together the principal European countries in the category “Europe,” and presents the United States separately.

In Europe, the proportion of national wealth held by the richest 10% was equivalent to more than 80% in 1810, and rose during the 19^th century and early 20^th century, reaching 90% in 1910. It then started to fall because of World War I and the concessions that the bourgeoisie were obliged to make in the face of the class struggles that followed 1914-1918. [22] The decrease continued after World War II for the same reasons and the share possessed by the richest 10% reached its lowest point in 1975 (slightly less than 60%). After that, it started to rise again, reaching nearly 65% in 2010. The share of the richest 1% followed the same general trend, going from a little over 50% in 1810 to just over 60% in 1910. It started to fall in 1910, and reached its lowest point in 1970-1975 (20%) then started to go up again. In the United States, the evolution followed the same chronological pattern, but it is important to underline that whereas the share possessed by the richest 1% and 10% was less than that of their European counterparts in the 19^th century, this situation changed as of the 1960s: today their slice of the cake is now greater than that of their European counterparts.

There are two obvious conclusions: 1. The trend is toward greater inequality, with a significant increase in the wealth held by the richest 1% and 10%; 2. The evolution of wealth distribution can be rigorously explained by the evolution of social struggles and power relations between different classes.

Piketty sums up the reasons that led to the reduction in the proportion of wealth possessed by the richest groups between World War I and 1970, and those that subsequently caused it to rise again: “To sum up: the shocks of the “first twentieth century” (1914-1945) – that is to say World War I, the Bolshevik revolution of 1917, the 1929 financial crisis, World War II, and the new policies of regulation, taxation and public control of capital that arose from those upheavals – led to historically low levels of private capital during the 1950s and 1960s. The wealth reconstitution processes appeared very quickly, then accelerated with the American-British conservative revolution of 1979-1980, the collapse of the Soviet bloc in 1989-1990, the financial globalisation and deregulation of the 1990s and 2000s, an event that marked a political watershed, reversing the previous trend, and giving holders of private capital in the early 2010s, despite the financial crisis that started in 2007-2008, levels of prosperity unknown since 1913.” [23]

It is clear that the world wars produced both profound popular resentment against the capitalist class, and were followed by major social struggles, which in several countries took the form of revolutionary crises. The 1929 financial crisis also resulted in radicalisation and significant social struggles (particularly in the United States). Those in power had to make concessions to popular demands. We shall see below, for example, the actions that were taken by the governments of the main countries after World War I and II with regard to taxation, influencing to various degrees the proportion of wealth and income appropriated by the richest 1%. We then observe, as from the offensive triggered by the capitalist class against the working classes during the 1970s and 1980s, [24] a radical change in the policies of those governments, particularly with regard to taxation.
To measure the evolution of wealth, [25] Piketty compares it to national income [26] “At the start of the 1970s, the total value of private wealth – net of debt – was between two and three-and-a-half years’ worth of national income in all rich countries, on all continents. Forty years later, at the start of the 2010s, private wealth represents between four and seven years of national income, [27] again in all the countries studied. There can be no doubt about the general trend: aside from the financial bubbles, we have witnessed the large-scale return of private capital in rich countries since the 1970s, or rather the emergence of a new form of wealth-based capitalism.” [28]

We also observe that public wealth has considerably decreased in the last 40 years, after having increased in several countries, particularly after World War II. In France, the government nationalised the Bank of France in 1945 together with the four largest deposit banks, the Crédit Lyonnais, Société Générale, National Bank for Trade and Industry, and Comptoir national d’escompte de Paris. Louis Renault, head of the Renault car company, was arrested in September 1944 for his collaboration under the Nazi occupation, and the company was nationalised in January 1945. [29] The British government nationalised the Bank of England in 1946. According to Piketty, in the industrial and financial sectors, in France, “the State’s share of national wealth exceeded 50% from the 1950s to the 1970s.” [30]

As Piketty also writes, we have observed: “… on the one hand, a movement of privatisation and gradual transfer of public wealth towards private wealth since the 1970s and 1980s; and on the other hand, a phenomenon of long-term adjustment of the prices of real estate and financial assets, which also accelerated in the 1980s and 1990s, in a political context globally very favourable to private wealth, in comparison with the decades immediately after the war.” [31] This second phenomenon is clearly connected with the financialisation of the economy.

Evolution of low and high salaries since the 1960s

We do not have room to sum up the evolution of income inequalities over the last two centuries. We shall limit ourselves to highlighting the evolution in France since 1968. The May 1968 general strike in France, and the Grenelle accords that followed it, led to a considerable increase in the minimum wage over 15 years: “That is how the buying power of the minimum wage rose in all by more than 130% between 1968 and 1983, while at the same time average wages increased by only about 50%, hence a very considerable compression in wage inequalities. The break with the previous period was clear and massive: the buying power of the minimum wage had risen by barely 25% between 1950 and 1968.” [32]

The turning point occurred in 1982-1983 when François Mitterrand’s government veered to the right.
In a context of stagnating wages, the highest salaries, those of the richest 1%, rose by 30% between the end of the 1990s and 2010, and those of the richest 0.1 % increased by 50%. [33]

On the other side of the Atlantic, a legal minimum wage was introduced in 1933 at the start of the Franklin D. Roosevelt’s presidency, 20 years before France. It reached its peak in 1969 (under Lyndon Johnson) when it was the equivalent of $10 per hour at 2013 prices. Since then, it has fallen, and in 2013 under Barack Obama, it was barely $7.25 an hour. [34] Also in the United States, with regard to all sources of income (wages, rent, profits, dividends, etc.), we observe that from 1977 to 2007, the richest 10% appropriated three quarters of the increase in national income; the richest 1% absorbing 60%. For the remaining 90%, growth has been less than 0.5% per annum. [35]

If we take into account the distribution of national income in several key countries, we observe everywhere over the course of the last decades that the richest 1% and 0.1% have increased their share.

Proportion of national income going to the richest 1% in 2010: United States approximately 20%, Canada and UK 14-15%, Germany 11%, Australia 9-10%, Japan + France + Spain + Italy 9%, Sweden + Denmark 7%. [36]

Proportion of national income going to the richest 0.1 %: during the 1970s, US 2%, France and Japan 1.5%; in 2010, US 10% (12% if we include capital gain on shares), France and Japan 2.5%. [37]

Let us examine several so-called emerging countries for which Piketty was able to gather reliable data. [38] Proportion of national income going to the richest 1%: China 4-5% in 1980, and 10-11% in 2010; India 4% in 1980, and 12% in 2010; Argentina 10% in 1970, and 18% in 2010; Colombia 18% in 2000, and 20% in 2010.

The interest of this data, apart from concerning a central aspect of the description of inequalities, is that we can demonstrate that the evolution of income is really linked to social struggles and the politics of the governments in power. This is one more reason for stating that collective action is the key for improving wages, in particular the lowest, and for reducing inequalities. Action is decisive for shaping government decisions and gaining concessions from employers.

The evolution of tax rates is also linked to social struggles

In France, whereas in 1914 the top tax rate on the highest income brackets was just 2%, it rose to 50% in 1920, 60% in 1924, and even 72% in 1925. In 1920, the decision to apply a sudden and very sharp increase was taken by a National Assembly with a right-wing majority that was afraid of the general strike and radicalisation that could have ensued due to a refusal to make concessions. In Germany, it went from 3% (1891-1914) to 40% in 1919-1920 at the height of the revolutionary crisis. In the US, it progressed from 8% before the 1914-18 war to 77% after the war. [39]

We see the same evolution with regard to inheritance tax rates. Legislators have imposed very high rates in response to popular pressure. This began just after 1914-18 and continued after the financial crisis in the 1930s. While the highest rate in France was just 6.5% before the war (in practice, it was reduced to 1%), it shot up to 30%. In Germany, it went from 0% before the war to 35% afterwards. In the United States, inheritance tax reached 70% in 1937-1939. [40] The rate of tax on inheritance is important and considered vital by the richest 10%, because 60-70% of major fortunes are inherited. [41]

Returning to the top income tax rate. Just before the crisis of October 1929, President Hoover cut the top rate to 25%. In 1933, Roosevelt notched it up to 63% in the first year of his presidency, then to 79% in 1937 (thus exceeding the 70% applied after 1919), then to 88% in 1942, and finally to 94% in 1944. The top rate remained at 90% until the mid-1960s. In his 1972 presidential campaign, the Democratic candidate George McGovern proposed to raise the top income tax rate to 100%, [42] but Nixon won the election. The rate fell progressively to 70% in the early 1980s. Ronald Reagan then lowered it to 60%. In the late 1980s, it dropped to 40%, then under George W. Bush to 35%. Over the period 1932-1980, the average top rate was 81% (to which should be added the 5% to 10% in state tax).

France and Germany applied top rates between 50% and 70% from the 1940s to 1980s. In the UK, the top rate reached 98% in the 1940s, and then again during the 1970s. [43]

Finally, we should note that the top rate applies in practice to the incomes of the richest 1% of the population.

The radical reduction in the top rates, particularly in the US and UK since the 1980s, has led to a major increase in the salaries of senior business executives and in the proportion of national income and wealth held by the richest 1%. [44]

After having reviewed the evolution of taxes on the highest incomes, Piketty concludes that a very high top rate is needed, more than 80% (82% to be exact) to be applied above $500,000 or $1 million; [45] 50% or 60% for incomes above $200,000. [46]

Piketty recognises that this will not be easy to obtain in the current context. In the United States, Congress acts largely in favour of the 1%. And with good reason: according to a serious estimate, the average wealth of the members of the US Congress stood at $15 million in 2012. [47]

Once again, the results of Piketty’s research show that a combination of two decisive actions is required. [48] 1. a broad-based information and training campaign to spread as much as possible the lessons of twentieth century history about how taxation policies have been directly influenced by the pressure of popular movements; 2. mobilisation within the framework of a platform to pursue a group of priority objectives.

Piketty and public debt

Piketty devotes a dozen or so very interesting pages to the question of public debt over the last two centuries, focusing his analysis mainly on France and the United Kingdom. He rightly states that in discussing public debt, studying the past is worthwhile for understanding and dealing with the challenges of the current crisis: “This complex question of the indebtedness of States and the nature of the corresponding wealth is at least as much a concern today as it was in 1800, and examining the past can enlighten us about this phenomenon, which is so significant in the world today. For even if public debt in the early twenty-first century is still far from attaining the astronomical levels of the early nineteenth century (at least in the UK); on the contrary, in France, and in many other countries it is near its historic record levels, and is probably the cause of more confusion today than during the Napoleonic era.” [49]

Between the end of the 18^th century and the beginning of the 19^th century, France and the United Kingdom adopted policies that were quite different regarding public debt. Whereas in the years 1760-1770, public debt stood at nearly 100% of national income in both countries, forty or fifty years later the situation had changed completely. France’s public debt was only 20% of its national income in 1815, whereas Britain’s debt had skyrocketed to 200% of national income.

How did that happen? In France, the burden of paying off public debt and the people’s refusal to bear that burden alone played a central role in the revolutionary explosion of 1789. Measures taken during the Revolution radically reduced the burden of public debt. Piketty sums up the sequence of events as follows: “The French monarchy’s inability to modernize its taxes and end the fiscal privileges of the nobility is well known, as is the ultimate revolutionary outcome, with the convening of the Estates-General in 1789, which led to the implementation of a new taxation system in 1790-1791 (including a real-estate tax affecting all landowners, and an inheritance tax on all estates) and the ‘two-thirds bankruptcy’ in 1797 (which in reality was an even more massive default, with the episode of the assignats [50] and the resulting inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. ), which closed the books on the Old Regime. That is why France’s public debt was suddenly reduced to extremely low levels at the start of the 19^th century (to less than 20% of national income in 1815).” [51]

Britain took a completely different path. In order to finance its war to oppose the Declaration of Independence signed by the 13 British colonies in North America, and “above all, the multiple wars with France during the Revolutionary and Napoleonic periods, the British monarchy chose to borrow without limit. Public debt went from approximately 100% of national income in the early 1770s to nearly 200% in the years after 1810 – ten times that of France in the same period.” [52]

Piketty explains that it took the United Kingdom a century of austerity and budget surpluses to reduce its indebtedness gradually to less than 30% of national income at the beginning of the second decade of the 20^th century.

What lessons can be drawn from Britain’s experience? First, there is no doubt, according to Piketty, that the heavy public debt increased the extent of private wealth in British society. Wealthy Englishmen readily lent money to the State.

Piketty goes on: “This heavy public indebtedness generally served the interests of the lenders and their descendants quite well – at least in comparison to a situation in which the British monarchy would have covered its expenditures by making them pay taxes. From the point of view of those who have the means to do it, it is obviously much more advantageous to lend a given sum to the State (and then to receive interest on it for decades) than to pay it in the form of taxes (without compensation). [53] He adds that the massive recourse to public debt by the State enabled the bankers to raise interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. , which was beneficial to the wealthy lenders such as entrepreneurs, the independently wealthy, and bankers.

According to Piketty, the essential difference with the 20^th century (see below) is that public debt was reimbursed at a premium in the 19^th century: “Inflation was quasi nil between 1815 and 1914, and the interest rate on government certificates was very substantial (generally around 4%-5%), and in particular was well above the growth rate. Under such conditions, public debt can be a very good deal for the affluent and their heirs.” [54]

Piketty offers a hypothetical case in which: “cumulative public debt … is equal to 100% of the GDP. Suppose that the government does not seek to reimburse the principal, but only pays the interest each year … if the interest rate is 5%, every year it will have to pay 5% of the GDP to the holders of this additional public debt, endlessly. That is basically what happened in the United Kingdom in the 19^th century.” [55] Now, let us travel in time and space: today in Greece, public debt is in excess of 160% of GDP. If we entertain the hypothesis that the State will reimburse that debt to the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

IMF : https://www.ecb.europa.eu/home/html/index.en.html and its other creditors at a rate of around 5% [56] on average, and if we also take into consideration that growth is non-existent [57] and that the rate of inflation is also nil, Greece will have to pay its creditors, indefinitely, the equivalent of 8% of its GDP without reducing the debt, since only the interest on it is being paid off. [58]

Now let us return to the 19^th century: total public debt in France, which was very limited in 1815, increased rapidly over the next decades, in particular during the period of the censitary monarchies (1815-1848). After the defeat at Waterloo in 1815, the French State went deeply into debt to finance the compensation paid to the armies of occupation, then again in 1825, to finance the famous “émigrés’ billion” [59] paid to the aristocrats who went into exile during the Revolution (to compensate them for the consequences of the Revolution, and in particular the confiscation of part of their land holdings). In all, public debt increased to the equivalent of over 30% of the national income. Under the Second Empire, debts were paid “cash on the nail”.

Piketty recalls the short work The Class Struggles in France, written in 1849-1850, in which Karl Marx denounces Louis-Napoléon Bonaparte’s Minister of Finance , Achille Fould – a worthy representative of the bankers and high finance –, who decided to increase taxes on beverages in order to pay off wealthy holders of government bonds. Twenty years later, following the defeat at the hands of Prussia in 1870-1871, the French State further increased public debt to pay a war tribute equivalent to some 30% of national income. Finally, the indebtedness policy conducted between 1880 and 1914, which was favourable to creditors, brought public debt to a higher level in France than in the United Kingdom – around 70-80% of national income, compared to less than 50% previously.

Piketty adds, “Government annuities were a very secure investment throughout the 19^th century in France, and contributed to reinforcing the extent and level of private fortunes, as was also the case in the United Kingdom.” He concludes that the policy of public indebtedness pursued during the 19^th century in France and the United Kingdom “explains why the socialists of the 19^th century, beginning with Karl Marx, were extremely mistrustful of public debt, which they perceived – rather clairvoyantly – as an instrument used to encourage the accumulation of private capital.” [60] He goes on to say, very accurately, “A large portion of the public debt (…) is held in practice by a minority of the population, so that the debt results in a major redistribution of wealth within a country (…). Given the very high concentration that has always characterized the distribution of wealth (…), studying these questions while ignoring the inequalities between social groups amounts to disregarding de facto a major aspect of the subject and the realities that are at play.” [61]

Piketty explains that over the course of the 20^th century, France underwent a major change in the way public debt is managed. The public authorities benefited from inflation, and then made use of it to reduce the real value of the debt. “The consequence for the State is that, despite a large initial public debt (close to 80% of national income in 1913) and very high deficits during the period 1913-1950, in particular during the war years, in 1950 France’s public debt was again at a relatively low level (approximately 30% of national income), as in 1815. In particular, the huge deficits of the Liberation were almost immediately wiped out by inflation in excess of 50% per year for four consecutive years, from 1945 to 1948, in a supercharged political atmosphere. In a way, it was like the ‘two-thirds bankruptcy’ of 1797 – the books were closed on the past in order to proceed with the reconstruction of the country with a low public debt.” [62]

Based on this experience in the second half of the 20^th century, a very different vision from that of Marx and the socialists during the 19^th century was developed, founded on the conviction that indebtedness can be an instrument in the interest of a policy of public spending and redistribution of wealth in favour of the poorest citizens.

“The difference between the two visions is quite simple: In the 19^th century, debt was reimbursed at a premium, which was to the advantage of the lenders and tended to bolster private fortunes; in the 20^th century, debt was diluted by inflation and reimbursed in “funny money,” making it possible de facto to put the burden of financing the deficits on those who had lent their wealth to the State, without having to increase taxes as much. This “progressive” vision of public debt in fact continues to hold sway with many thinkers in the early 21^st century, even though inflation has long since fallen back to levels that are not far from what they were during the 19^th century, and its distributive effects are relatively obscure.” [63] Thomas Piketty is quite right to stress the dangers of a unilaterally positive vision of public debt.

Piketty’s proposals

Let us now analyse what Piketty proposes. From the outset, he makes it clear that he does not defend public debt in anyway: “I have repeatedly stated that it often results in reverse redistributions, from those who have less to those who can afford to make loans to the State (and who as a rule ought to pay taxes instead).” [64] We can only agree with this statement. He adds that “national capital is very poorly distributed, with private wealth exploiting public poverty, which means that we currently spend much more paying interest on debt than we invest in higher education. This is actually a rather old situation: considering the rather slow growth since the 1970s-1980s, we are in a historical era in which debt is a heavy burden on the treasury. This is the main reason it must be reduced as quickly as possible (…)” [65].

Piketty considers (but rejects) two solutions for reducing public debt, before proposing a third one. The first rejected solution is to privatize public assets to repay the debt. The second consists in cancelling the debt. The third one, which he supports, is to levy an exceptional progressive tax “so as to spare those with the least amount of wealth, and ask more of those with the most.” [66]I will not spend much time on the first solution, because it is so clear to me that it must be rejected. This is the solution currently being rolled out by governments that are merely extending the wave of privatisations undertaken in the 1980s-1990s.

As for the second solution, which Piketty also rejects, it is obvious that he does not fully explore all possible scenarios for debt cancellation. The only model he mentions explicitly is the one applied to Greek debt in March 2012, a so-called haircut operation, while there are other possibilities.

He is right to reject this kind of partial debt cancellation devised by the Troika (the European Commission, ECB ECB
European Central Bank The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html , and IMF IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org ) for Greece. In this case, debt cancellation was based on measures that run against the civic, political, social, and economic rights of the Greek people, and it contributed to dragging Greece even further into a downward spiral. The operation aimed at making it possible for foreign private banks (mainly French and German ones) to pull out while limiting their losses, for private Greek banks to get fresh capital from the public treasury, and for the Troika to tighten its long-term grip on Greece. While Greek public debt amounted to 130% of GDP in 2009, and 157% in 2012 after partial debt cancellation, it reached 175% in 2013! The unemployment rate, which was 12.6% in 2010, was 27% in 2013 (50% among youths under 25). Piketty is thus completely right when he rejects such haircuts, which merely aim to keep the victim alive in order to bleed it longer.

On the other hand, he is wrong to not give serious consideration to the idea of debt cancellation or the suspension of debt payments as decided on by the debtor country, on its own terms, and under citizen control. This is what Ecuador in 2008-9 and Iceland from 2008 onward did in two different sets of circumstances. Based on an audit decided on by the government and carried out with the active participation of citizens in 2007-2008, Ecuador unilaterally suspended payment on the portion of its public debt owed as securities maturing in 2012 and 2030, which were mainly held by foreign banks. [67] The outcome was positive: Ecuador bought back 91% of these securities at less than 35% of their market value. Thanks to what the country had saved in debt repayment, it could greatly increase social spending, particularly in the fields of education and healthcare (see Appendix 2 for a more detailed presentation of Ecuador’s experience). In the case of Ecuador, we should not simply take the current process as a model: it is essential to continue analysing the situation there. However, it does demonstrate that a State can take a unilateral sovereign decision in terms of debt auditing and suspension of payment, and consequently increase public spending in fields such as education and health.

From the end of 2008, Iceland unilaterally refused to pay for the debts of private banks that owed money to foreign creditors. This occurred in the context of strong citizen mobilisation that put pressure on Iceland’s government to refuse the claims of foreign creditors, especially the UK and the Netherlands.

What happened in Iceland? Because of the collapse of the banking system in 2008, Iceland refused to pay compensations to people in the UK and in the Netherlands, who had deposited a total of €3.9 billion in subsidiaries of private Icelandic banks that had just collapsed. The British and Dutch authorities compensated their own citizens, and demanded that Iceland pay them back. Under popular pressure (demonstrations, sit-ins, referenda), the Icelandic government refused. As a result, Iceland was listed as a terrorist organization, Icelandic assets were frozen in the UK, and the Icelandic government was sued by London and The Hague in the Court of Justice of the European Free Trade Association States (EFTA). [68] In addition, Iceland completely blocked the outflow of capital. Ultimately, it fared much better than many other European countries that had met their creditors’ demands. Of course, we should not simply take Iceland as a model to be emulated, but we should draw lessons from its experience.

Ecuador and Iceland are two recent examples that should be examined carefully for they show that there are solutions for debt cancellation other than the Greek haircut. [69] Those two examples offer proof that if you do not comply with creditors’ demands your country does not simply collapse, quite the opposite.

Let us return to Piketty’s position. He is convinced that cancellation will hardly affect the richer creditors, because they will manage to “restructure their portfolios on time” and consequently he claims that “there is no guarantee that those who will have to pay are those who should.” [70] However, he produces no evidence that is based on concrete examples or statistical data to support this, while history shows that when a country hints that it might stop repaying its debt or when it actually does, the market value of its debt securities plummets, and it is very difficult for stockholders to unload them at a good price. [71] This is what occurred between 2007 and 2009 in Ecuador, and all those who follow what is happening on the debt market know that it is virtually impossible to get rid of a large amount of securities without significant losses in the case of unilateral debt cancellation or suspension. Moreover, it is easy for a country taking such measures to provide compensation and protection to those with limited income, assets, and savings. It is quite possible to make sure that those who should pay do while protecting those who deserve to be protected.

Let us now examine Piketty’s proposal on finding the means necessary to reduce the burden of public debt. After considering the possibility of “a 15% proportional tax on all private assets,” [72] he rejects this idea, because as he writes “it would not make much sense to levy a proportional tax [73] on all European private assets.” [74] He claims that “it would be better to use a progressive schedule so as to spare those with the least amount of wealth, and levy more on those who have the most wealth.” [75]

Piketty is favourable to a partial reduction of the debt, amounting to 20% of the GDP. In order to reach this objective, he suggests that a progressive exceptional tax be levied: “0% under €1 million, 10% between €1 and €5 million, and 20% beyond €5 million,” [76] while recognising that other rates could be used.

It must also be mentioned, and deplored, that Piketty never considers the issue of the legitimacy of public debt. It is actually astonishing, because throughout the book he shows that a regressive tax policy results in an increase in public debt, and that, as he states repeatedly, those who pay back the debt are for the most part lower-income people, given the share of taxes they pay, while those in the higher income brackets lend to the State, since this is a safe investment. He does not suggest either that citizens should organise and audit the debt, while he must know that in France (and elsewhere in Europe), since 2011 citizen debt audit initiatives have been developing with a certain amount of success. [77]

Piketty’s central idea to create a worldwide, progressive tax on capital

Piketty declares that it is essential “to adequately revamp the 20^th century social-democratic and neo-liberal fiscal programme.” He believes that we must defend and improve both the welfare state and the progressive income tax system. We must also innovate “by establishing a progressive worldwide tax on capital, accompanied by a high degree of financial transparency.” This “institution would enable us to avoid a spiral of perpetually increasing inequality and effectively regulate the disturbing wealth concentration dynamic that has been developing throughout the world.” [80]’

Piketty has no illusions about how fast his proposition will be put into practice: “A worldwide tax on capital is utopian: it is hard to imagine in the near future all the nations on earth agreeing to put it in place, establishing a tax schedule that would apply to all the great fortunes on the planet, then harmoniously distributing the revenues raised to all countries. However, it is a useful utopia (…).” [81]

Piketty specifies that “In my opinion, the goal must be to levy an annual, progressive tax on capital [82] at the individual level, i.e., on the net value of the assets each person owns.” [83] He proposes three variants for this progressive tax on private capital.

Variant 1: a rate of 0% below €1 million; 1% from €1 to €5 million; 2% more than €5 million
Variant 2: upward adjustment, 5% or 10% beyond €1 billion
Variant 3: downward adjustment, 0.1% below €200,000, and 0.5% from €200,000 to €1 million.

This tax is complementary to what already exists, but it could be used to decrease the current tax payments (or to reduce the national debt, note 1, p.840). It would result in a relatively small increase in current national incomes. Even if it were very low, this tax would give authorities knowledge on the wealth of the inhabitants in the areas concerned.

Piketty adds: “At the present time, the international organisations in charge of regulating and monitoring the world financial system, such as the International Monetary Fund, have only extremely approximate knowledge on the distribution of financial assets throughout the world, and in particular the amount of assets based in tax havens.” [84] If it were established, “the tax on capital would be a kind of world finance registry, which does not exist today.” [85]

We fully support Piketty’s proposition for a progressive tax on private wealth or capital to employ the term he uses; however, we do not agree with him when he argues that the highest priority must be placed on this objective. Instead, a programme with complementary measures must be created. A progressive tax on capital, along with the cancellation of illegitimate debt and a drastic reduction in the portion of public debt not found to be illegitimate, must be included in a comprehensive programme that would enable society to make a transition toward a post-capitalist and post-productivist system. First implemented in one or two countries, such a programme should also have European and worldwide ambitions. It should put an end to austerity measures, reduce the amount of time worked by hiring new employees while maintaining wages, and socialise the banking sector. There must also be a general fiscal reform, measures to ensure gender equality, and the implementation of a well-defined policy that will ensure the ecological transition. [86]

Piketty is under the illusion that he will be able to convince others of the need to give highest priority to his proposition, whereas what would be truly effective and unite people would be to define a common platform, bringing together the maximum number of people in favour of radical democratic change that will foster social justice.

In addition, as we argue in “Cancelling debt or taxing capital: why should we choose?”: “The essential critique that can be made of Thomas Piketty is that he thinks the solution may be found within the current system. He proposes a progressive tax to redistribute wealth and save democracy, but he does not question the very conditions in which this wealth is produced or the consequences of the current system. His idea is only a solution for one of the negative effects produced by the system, but he does not tackle the true causes of the problem. First of all, if a tax on capital were applied as a result of social struggle, the great danger is that its product would go up in smoke to repay illegitimate debt, if that debt is not first cancelled. Furthermore, can we content ourselves just because the wealth produced by the system is shared more fairly, if this same system remains predatory, has no respect for people or common property, and destroys our ecosystems at an increasingly faster rate? Capital is not only a useful means of production that deserves a regular 5% return on investment as Piketty suggests, it is also an important vector of social relationships of domination by the possessing classes over society as a whole. Capitalism as a mode of production is not only the cause of more and more unbearable social inequalities. It is also a menace to our ecosystem, the justification for the plundering of common property, domination, exploitation, and alienation of the people through materialistic values, and a logic of accumulation that transforms men and women into spiritually enslaved individuals obsessed by material possessions to the detriment of the immaterial basis underlying our humanity.” [87]

One of the characteristics and weaknesses of Piketty’s approach is that he does not call for a mobilisation of the social movements to try to have an influence on current policies. He is conscious that the people played a decisive role in the orientations taken since World War I, and denounces the repression of the miners in Marikana, South Africa in August, 2012, but in the more than one hundred pages at the end devoted to his own propositions, which reflect on the solutions to the basic problems, no mention is made of organised citizen action, and no allusion is made to the Indignados movement, even if in the pages just before his propositions, he does mention the Occupy Wall Street movement. At best, he expresses the hope that the dissemination of research like his will raise people’s awareness and thereby ultimately lead to change. This is a major weakness in Piketty’s approach. It comes as no surprise then that he proposes to establish a “Eurozone Budget Parliament” [88] alongside the European Parliament. He suggest that “This Parliament could include about fifty members for each of the big countries in the zone, in proportion to the population. Its members could be chosen from the finance and social affairs commissions of the national Parliaments, or appointed in some other way.” [89] In addition, he is favourable to “the election of a European Union President on the basis of the popular vote, a proposition which should be logically accompanied by an extension of his or her powers.” [90] Piketty embarks on a pathway to making reforms that does not question the European treaties and institutions in which the defence of the interests of major capital owners is set in stone. Yet, we all know that fundamental change is necessary, and that it must include the abrogation of those treaties and the initiation of a constituent process with the production of registers of grievances by citizens united in action.

To conclude, Piketty’s work is extremely valuable in terms of the clear data it provides on trends in wealth inequalities over the past two centuries. His book gives us a very useful tool for understanding them, and will enlighten the debate on possible alternatives. Unfortunately, he fails to go far enough in terms of the need to join theory and action, issues relating to debt cancellation, and taxation thresholds.

Translated by CADTM