April 17, 2012 / 3:56 PM / 8 years ago

Inequality guru sees "French Roosevelt" in Hollande

PARIS (Reuters) - 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 a million euros ($1.3 million) 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 U.S. election campaign focused on taxation and the debt crisis besetting euro zone governments.

Frontrunner in polls ahead of Sunday’s first round of voting[ID:nL6E8FD597], 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 U.S. response to the Great Depression of the 1930s, told Reuters that Hollande may 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, told Reuters.

A long-time 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.

ROOSEVELT’S INVENTION

Piketty’s studies show that 30 years of falling tax levels have widened income inequality in many countries, particularly the United States, 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 United States, while the political response is coming in France,” he told Reuters in the interview at the Paris School of Economics, where he teaches.

The muted political response in the United States 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 American invention, under Franklin Roosevelt. The president raised marginal tax rates to over 70 percent in 1936 and to more than 90 percent during World War Two.

That U.S. example was emulated by Britain and continental Europe, where, in the post-war 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 U.S. campaign for November’s presidential election.

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 U.S. tax rates by 20 percent.

NEW INEQUALITY FINDINGS

Piketty studied mathematics and economics in Paris and at the London School of Economics (LSE), gaining his doctorate at only 22, before moving to the Massachusetts Institute of Technology (MIT). 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 United States and his study 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 U.S. 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 U.S. media, including in a front-page account of their influence on U.S. 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 United States, the share of total income going to the top 10 percent of earners remained stable at around 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 1,500 euros gross ($1,950) per adult per month, or 27 percent of national income, while the top 10 percent earned 8,600 euros per adult or 31 percent of the total.

The top one percent - about 500,000 people - earned 30,000 euros per month or 11 percent of national income.

Wealth is even more unevenly distributed.

Per adult, the bottom half of the French population had assets of 14,000 euros on average, owning just 4 percent of all wealth. The richest tenth had assets of 1.1 million euros per adult or 62 percent of the total. The top one percent had assets of 4.4 million euros per person, or 24 percent of all wealth.

This pattern of wealth distribution is similar to most west European countries, but the imbalance is more extreme in the United States, where the wealthiest 10 percent of citizens own 72 percent of national assets and the poorest 50 percent together account for just two percent, the studies show.

“DOTTY AS POINTILLISTE”

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 United States and Britain, have not seen above-average economic growth in the past 30 years, Piketty argues, dismissing the notion that high taxes would make the most talented people flee.

“In a country with 65 million people, we will always find competent executives who are ready to work in large corporations and the financial sector and agree to be paid less than 1 million euros per year, and will even work hard for only 300,000 or 400,000 euros,” he said.

“Above 1 million per year you are no longer rewarding productive behaviour, you are only rewarding greed and excessive financial risk-taking,” said Piketty.

Augustin Landier, a French academic who has taught at top U.S. universities and has done research on the pay of company chief executives, disagrees, however.

“Many academics have the view that anybody can be the CEO of a large company, but that is not true,” he said.

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 [ID:nL5E8E23IP] - Hollande’s proposal has been widely criticised at home and abroad.

“The 75-percent income tax rate is dottier than a pointilliste painting,” Britain’s Economist weekly wrote this month in scathing review of Hollande’s policies. “French firms are already struggling to hire foreign talent.”

Landier said that if it turns out that the 75-percent tax is implemented comprehensively, many companies will be tempted to move abroad and an already large diaspora of French professionals in London and New York will swell further. But he expects some loopholes to be left open to soften the impact.

Even Hollande’s own plans were initially less radical.

In a keynote speech on January 22, he proposed to increase marginal tax rates slightly, from 41 percent on incomes of over 75,000 euros a year to 45 percent - still lower than the 53 percent in force in 2002, the last time there was a Socialist government in France.

“At that time, I said publicly this was not enough to curb the rise of inequality, and that Hollande needed to be more audacious, especially for the very top incomes,” said Piketty.

Then, in February, Hollande announced his 75-percent plan in a live television interview, stunning even some of his closest advisers.

His final programme also embraced Piketty’s call for a radical overhaul of the complex French tax system, recommending that it be replaced with a generalised progressive tax on all forms of income, deducted at source.

But Hollande did not say when this would be implemented.

“Hollande agrees with the principle, but he has not given a calendar,” Piketty said, acknowledging that it would be a tough sell politically. “I fear that if he does not do it during his first year in office, the tax reform will never happen.”

Editing by Paul Taylor and Alastair Macdonald

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