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Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
by afew
Fri Feb 27th, 2009 at 06:30:19 AM EST
Bring back the 90% marginal tax rate, says economist Thomas Piketty in a recent article in Alternatives Economiques. Crazily high earnings for top executives in business and finance are a danger for the economy and democracy, he argues, and the return to a strongly progressive income tax would discourage them more efficiently than proposed caps on executive pay.
Piketty links the current crisis clearly to the economic cycle of the last thirty years (though he doesn't comment on the neoliberal political decisions that determined it), that has seen a massive reduction in tax progressivity in the US, then in Europe, followed by an explosion in super-high remuneration and in wage inequality. This high remuneration is, he says, one of the motors of the crisis because the system favours high-risk behaviour by managers and traders. The higher the risk, the higher the potential gains: if you win, you win big, if you lose, the hit is taken by the company and the mass of its employees, or, if need be, the taxpayer is called in to make good your losses. (In other words, privatize gains, socialize losses).
| Thomas Piketty : "Il faut taxer fortement les très hauts revenus" | | Thomas Piketty : "We need a heavy tax on very high incomes" | | on ne peut pas faire l'impasse sur la crise actuelle: c'est tout de même la preuve patente que ces rémunérations astronomiques ont suscité des choix qui nous contraignent d'injecter des centaines de milliards d'argent public pour sauver le capitalisme. C'est une démonstration grandeur nature du caractère inefficace des bonus en tout genre et du fait que cette explosion des hautes rémunérations relève tout bêtement d'une captation pure et simple de la richesse par le groupe dirigeant. | | ...we can not pass over the current crisis in silence: it's all the same evident proof that these astronomical earnings led to choices that now force us to inject hundreds of billions of public money to save capitalism. This is a life-size demonstration of the inefficient nature of bonuses of all kinds, and of the fact that this explosion of high remuneration is a matter of pure and simple wealth capture by the ruling group. |
When public money saves companies in this way, it can come with strings attached, such as a cap on salaries and bonuses. Piketty thinks measures of this kind can be got round fairly easily by using payments from subsidiaries, consultancy fees, etc. A punitive marginal rate on the income tax would be more efficient:
| On affirmerait aux yeux de tous qu'au-delà d'une certaine limite, si vous prenez un euro de plus, il y aura 90 centimes qui iront directement dans les caisses de l'Etat. De quoi diminuer automatiquement l'intérêt individuel à obtenir une rémunération extravagante. | | It would be publicly stated that beyond a certain limit, if you take one more euro, 90 cents will go directly into the coffers of the state. Enough to automatically reduce an individual's interest in obtaining excessive remuneration. |
Piketty points out that a high marginal rate was brought in by Roosevelt (after a similar period of weak tax progressiveness, an explosion of high earnings, and a crisis...), who hiked the top rate up, in three steps, from the 25% it stood at when he became president to 91% in 1941.
| quand Ronald Reagan est élu président, en 1980, le taux marginal d'imposition est encore de 70%. C'est ainsi qu'entre 1932 et 1980, le taux marginal d'imposition applicable aux plus hauts revenus a été supérieur à 80%, en moyenne. Pendant un demi-siècle. Et cela ne se passe pas en Union soviétique, mais aux Etats-Unis d'Amérique! | | ...when Ronald Reagan was elected president in 1980, the marginal tax rate was still 70%. So, between 1932 and 1980, the marginal tax rate applicable to the highest incomes was over 80% on average. For half a century. Not in the Soviet Union, but in the United States of America! |
During that time, top executives had very comfortable pay, but the progressive nature of the income tax placed a cap on their demands.
| La leçon de cette histoire est que ce niveau d'imposition marginale n'a pas tué le capitalisme, ni mis au pas les droits de l'homme. Une leçon bonne à rappeler dans un moment où l'on nous explique, pour justifier le bouclier fiscal, que c'est un droit de l'homme fondamental de ne pas payer plus de 50% d'impôts quand on perçoit des bonus de plusieurs millions d'euros. Eh bien, on a fait tout autrement durant un demi-siècle sans que le capitalisme et la démocratie s'en soient moins bien portés pour autant. Bien au contraire. | | The lesson this story gives is that this level of marginal taxation did not destroy capitalism, neither did it constrain human rights. A good lesson to remember at a moment when we are told, by way of justification for the "tax shield" (1) , that it's a fundamental human right not to pay more than 50% tax when getting paid a bonus of several million euros. Well, things were organised very differently for half a century without capitalism and democracy suffering for it. Quite the contrary. | | | (1) tax shield: Sarkozy-inspired law that no one need pay more than 50% of their income in total taxes. |
Piketty also dispenses with the objection that talented, hard-working individuals must be highly rewarded for their contribution to economic efficiency. No study demonstrates that; on the contrary, several studies show that, above a certain level, top executive pay is no longer correlated to the results obtained. Studies also show higher remuneration where company equity is dispersed: the less powerful the shareholders, the more pay top management votes itself. Finally, all the available studies cast doubt on the idea that higher pay leads to higher performance.
And economic theory seems little able to explain what has been happening:
| De toute évidence, le marché n'a pas empêché cette dérive. Le marché remplit de multiples fonctions économiques avec une grande efficacité. Il permet de définir un point de référence autour duquel gravite la plupart des rémunérations. Au-delà des multiples facteurs conventionnels qui influent sur le niveau et la structure des rémunérations, les salaires perçus par la masse des salariés peuvent être mis en rapport avec leur productivité marginale - qu'il est possible d'évaluer, ne serait-ce qu'approximativement (on sait à peu près de combien varie la production d'une entreprise avec un ouvrier ou un serveur en plus). | | Evidently, the market did not prevent this drift. The market efficiently performs many economic functions. It helps define a point of reference around which most earnings gravitate. Beyond the many conventional factors that influence the level and structure of remuneration, salaries paid to a broad majority of wage-earners can be seen in relation to their marginal productivity - which it is possible to evaluate, if only approximately (we know roughly how much the output of a company varies with one extra worker or waiter). | | En revanche, pour les quelques centaines de cadres dirigeants des grands groupes, dont les fonctions ne peuvent être dupliquées, les lois du marché ne nous permettent pas d'évaluer la contribution de chacun aux résultats de l'entreprise. Elles ne nous disent rien sur le bon niveau de rémunération au-delà d'un certain seuil. Et si on les laisse faire, les dirigeants se nourrissent de cette incertitude fondamentale pour se servir dans la caisse. | | In contrast, for the few hundred top executives of major groups, whose functions cannot be duplicated, market laws do not allow us to evaluate the contribution of each to the results of the company. They tell us nothing about the right level of remuneration beyond a certain threshold. And if it's allowed to, top management takes advantage of this fundamental uncertainty to help itself out of the cash register. |
On tax, see also Two great tastes that taste crappy together by Jake S
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