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What if economists were about to change?

Summary:
Let’s celebrate. The American Economic Association (AEA), the main professional organisation for economists in the United States, has just awarded the Clark Medal to Gabriel Zucman for his work on the concentration of wealth and tax evasion. Awarded each year to a winner under the age of 40, the distinction is given in particular for innovative work demonstrating the considerable importance of tax evasion by the richest, including in Scandinavian countries, which are often considered models of virtue. Endowed with an immense capacity for work, a rare attention to detail and an unparalleled talent for unearthing new data and making it speak for itself, Gabriel Zucman has also revealed the unsuspected extent of corporate tax evasion by multinationals in all countries. Now director of the

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Let’s celebrate. The American Economic Association (AEA), the main professional organisation for economists in the United States, has just awarded the Clark Medal to Gabriel Zucman for his work on the concentration of wealth and tax evasion.

Awarded each year to a winner under the age of 40, the distinction is given in particular for innovative work demonstrating the considerable importance of tax evasion by the richest, including in Scandinavian countries, which are often considered models of virtue. Endowed with an immense capacity for work, a rare attention to detail and an unparalleled talent for unearthing new data and making it speak for itself, Gabriel Zucman has also revealed the unsuspected extent of corporate tax evasion by multinationals in all countries.

Now director of the European Tax Observatory, he devotes the same energy to finding solutions to the ills he documents. In one of its first reports, the Observatory demonstrated that EU Member States could choose to go further than the 15% minimum rate set by the OECD (which is too low and largely circumventable), without waiting for unanimity. By imposing a 25% rate on the profits of each multinational company wishing to export goods and services – the same as that paid by domestic producers – then France would gain an additional €26 billion in revenue and encourage other countries to do the same.

The fact that the AEA has chosen to reward this work is important because it shows that the core of the profession is beginning to realise that the current social and fiscal model is unsustainable. Let us not overstate the case: economists have always been less monolithic than is sometimes imagined, including in the US. In 1919, AEA President Irving Fisher chose to devote his Presidential address to the issue of inequality. He told his colleagues that the growing concentration of wealth was becoming America’s main economic problem, and if left unchecked, America would become as unequal as old Europe (then perceived as oligarchic and contrary to the American spirit). Fisher was distressed by Willford King’s 1915 estimates that « 2% of the population owns more than 50% of the wealth », and that « two-thirds of the population owns almost nothing », which he saw as « an undemocratic distribution of wealth » threatening the very foundations of American society.

It is in this context that the United States applied rates of over 70% at the top of the income hierarchy from 1918-1920 (under the Democrat Wilson), before any other country. When Roosevelt was elected in 1932, the intellectual groundwork had long been laid for the introduction of a high degree of tax progressivity, with the famous Victory Tax of 88% in 1942 and 94% in 1944. The United States would apply similar rates in Germany and Japan: in the spirit of the times, these fiscal institutions were seen as an indispensable complement to democratic institutions, without which the latter might sink into a plutocratic drift.

Unfortunately, these lessons have been forgotten, and the United States and much of the world has entered a new oligarchic spiral since the 1980s and 1990s. It would certainly be an exaggeration to blame only economists for this. If the counter-offensive launched in the 1960s and 1970s by Friedman and Hayek was able to bear fruit, it was also due to a lack of collective appropriation of the New Deal institutions among citizens and within the social and trade union movement. The intellectual battle was also played out in the philosophy departments: when Rawls published his « Theory of Justice » in 1971, he laid the conceptual foundations of an ambitious egalitarian programme but remained relatively abstract in its practical implications. At the same time, Friedman and Hayek were perfectly clear on their objective of demolishing tax progressivity.

The fact remains that economists bear a particular responsibility for the deregulation and liberalisation movement of recent decades. There are, of course, the effects of the search for private funding, which tends to right-wing the discourse. In 2016, when Sanders and Warren take up bold wealth tax proposals (with rates of up to 6-8% per year above $1 billion), Former Clinton Treasury Secretary and Harvard President Larry Summers – a great advocate of absolute liberalisation of capital flows – nearly chokes and does not hesitate to violently attack researchers like Zucman who support these proposals (which are, however, common sense, given the almost zero income tax rates paid by billionaires).

There are also intellectual reasons linked to the evolution of the discipline of economics. In order to give itself an autonomous scientific appearance, economics has tended to cut itself off from history and sociology and to naturalise the institutions studied (the market, property, competition), forgetting in the process their social and political embedding within particular societies. Mathematical models can be useful if they are used wisely and not as an end in themselves. Statistical techniques can be useful, provided that we do not lose sight of the critical view of sources and categories. There is still a long way to go before political and historical economy regains its rightful place in the social sciences.

Thomas Piketty
Thomas Piketty (7 May 1971) is a French economist who works on wealth and income inequality. He is a professor (directeur d'études) at the École des hautes études en sciences sociales (EHESS), associate chair at the Paris School of Economics and Centennial professor at the London School of Economics new International Inequalities Institute.

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