Capital in the Twenty-First Century

Commenting on the rise of fascism, British philosopher Bertrand Russel noted that “political democracies that do not democratize their economic systems are inherently unstable” (653). Contemporary western societies face two challenges in terms of achieving democratization. That is, they face two tests to ensure that the majority have a say in how their economies are run and that they are meaningful stakeholders in capitalism’s future. These hang on the issues extreme and growing inequalities of wealth and of rising and unmeritocratic inequalities of income. Both these problems must be resolved if western democracy is to avoid profound, and fatally destabilising, conflict in the century to come.

Taking the second issue first, Piketty recommends an increase in progressive tax on the highest incomes. Such progressive taxes in the 20th century, as he says, “offered a way of limiting the inequalities of industrial capitalism while maintaining respect for private property and the forces of competition” (638). In other words, high income tax prevented extremes of income inequality and did so without recourse to confiscation of property or the abolition of markets. They also helped to fund the social state which brought education, health, and basic economic security to all. Regrettably, these taxes were cut as part of the neo-liberal reforms of the 1980s and they have remained low ever since. For example, the top marginal rate of tax in the US was seventy percent up to 1981. It then fell to fifty percent in 1982 and thirty-eight-point five percent in 1987, where it has roughly remained to the present. In the UK, the top rate of income tax was eighty three percent in the 1970s, until 1979, when it was cut first to sixty percent, then again to forty percent in 1987. It currently stands at forty five percent.

Piketty argues that a return to pre 1980 tax rates would help limit the most egregious pay inequalities and temper incentives for executives to ask for large pay raises. It would also secure “consensus support for the fiscal and social state” (635) which been eroded by two factors since the 1980s.

First, cuts in social spending, in part a consequence of lowered taxes and government revenues, have led to a deterioration in many public services. This has meant middle-class people increasingly rely on private health, transport, and education to guarantee quality of services. As a result, they question why they are paying taxes for services they do not use. This undermines support for the social state even further (an extreme example of this situation can be seen in modern day South Africa).

Second, low top marginal rates of tax mean that, when combined with their large incomes from capital and greater resources to limit or avoid tax, the richest end up paying proportionally less than the middle classes. The latter are therefore more likely to question the legitimacy of having income taxes in the first place. This may lead to demands for lower taxes for themselves, and a further dislocation from, and erosion of, the social state. Higher progressive top income tax rates could reverse these trends, limiting inequality and helping create a common stake in a fairer society. This would be underscored by the social roles of the state. As Piketty says, it would give the US government in particular, “the revenues it sorely needs to develop the meager US social state and invest more in health and education” (661). In short, it would allow for a rejuvenated social role for the state, and it would provide a fairer means of cutting the deficit without slashing support for social programmes even further.

The question, however, is whether this proposal is politically attainable. It would certainly be in the interest of the majority, including the middle class. Yet what if, as Piketty asks, along with that of other western nations, “the US political process has been captured by the one percent” (661)? What if the increased wealth and incomes of the richest have allowed them an effective stranglehold on political power? This could be because politicians and political parties rely on financial support from wealthy donors. In addition, the media is owned by an increasingly wealthy elite, who circumscribe the terms of political debate. In these cases, a higher top rate of income tax would be prematurely dismissed as politically unfeasible. At the same time, it would be attacked by the media, despite the evidence to the contrary, for threatening productivity, and the well-being of all.

Still, it is possible that the capturing of politics and the media by the rich is not absolute. New political actors and movements may emerge which challenge this hegemony, and again make Piketty’s suggestion politically viable.