Archives for posts with tag: capital

The Hidden Wealth of Nations, Gabriel Zucman, 2015


Tax havens are at the heart of financial, budgetary, and democratic crisis.

On a global scale, 8% of the financial wealth of households is held in tax havens. In the spring of 2015 foreign wealth held in Switzerland reached $2.3tn.  Since April 2009, when countries of the G20 held a summit in London and decreed the ‘the end of bank secrecy’, the amount of money in Switzerland has increased by 18%. For all the world’s tax havens combined, the increase is close to 25%. And we are only talking about individuals here. 55% of all the foreign profits of US firms are now kept in such havens.

To fight offshore tax avoidance, the first measure is to create a worldwide register of financial wealth, recording who owns what. Financial registry exist but they are fragmentary (Clearstream).

In France, on the eve of the 1914-18 war, a pre-tax stock dividend of 100 francs was worth 96 francs after tax. Throughout the 19th century, European families paid little or no tax. In 1920 the world changed. Public debt exploded. That year the top marginal income tax rose to 50%, in 1924 it reached 72%. The industry of tax evasion was born.

In 1920, the wealth was made up of financial securities: stock and bonds payable to the bearers. Owners looked for safe places to keep them.  The bank then took the responsibility for collecting dividends and interest generated by those securities. Many banks could do this but Swiss bank offered the possibility of committing tax fraud. Off-balance sheet activities are the holding of financial securities for someone else (they don’t belong to the bank but to clients). The most rapid growth of assets in Swizerland were in 1921-22 and 1925-27. Swiss bank secrecy laws followed the first massive influx of wealth (from France mostly), not the reverse.

For the most part, non-Swiss residents who have accounts in Switzerland do not invest in Switzerland – not today, not in the past. Swiss bank offshore successes owes nothing to the strength of the Swiss francs. It has to do with tax evasion.

Charles de Gaulle imposed a condition on the rapprochement between Switzerland and the allies in 1945: Berne was to help identify the owners of undeclared wealth. For Congress it was out of the question to send billions of dollars via the Marshall Plan without trying to tax French fortunes hidden in Geneva. Berne then engaged in a vast enterprise of falsification: they certified that French assets invested in US securities belonged not to French people but to Swiss citizens or to companies in Panama.

Recent policy changes are making it more difficult for moderately wealth individuals to use offshore banks to dodge taxes: for them the era of banking secrecy is coming to an end. The decrease of little account is more than made up for by the strong growth of assets deposited by the ultra-rich, in particular coming from developing countries.

In Switzerland, banks managed $2.3tn belonging to non-resident. $1.3tn belong to Europeans (DE,FR,IT,UK), mostly through trust and shell corporations domiciled in the British Virgin Islands. 40% is placed in mutual funds, principally in Luxembourg.  With more than $150bn in Switzerland – more than the US has, a country with a GDP 7 times higher – the African economy is the most affected by tax evasion.

If we look at the world balance sheet, more financial securities are recorded as liabilities than as assets, as if planet Earth were in part held by Mars. This amount to $6.1tn in 2014 and the bulk of the imbalance comes from Luxembourg, Ireland and Cayman Islands. This imbalance is a point of departure for estimate of the amount of wealth held in tax havens.  I estimate that $7.6tn (8% of global household financial assets) is held in accounts located in tax havens (this includes $1.5bn of bank deposits). The true figure, all wealth combined, is 10% or 11%.

It is one of the great rules of capitalism that the higher one rises on the ladder of wealth, the greater the share of financial securities in one’s portfolio. Corporate equities – the securities that confer ownership of the means of production, which leads to true economic and social power – are especially important at the very top.

On a global level, the average return on private capital, all class of assets included, was 5% per year during the last 15 years. Slightly decreased since the 1980-90, when it was closer to 6%. This is real rate, after adjusting for inflation.  Prudent funds, with 40% low risk bonds, have earned on average 6% per year. Those who invest in international stocks have returned more than 8%. As for Edge funds, reserve for the ultra-rich, their average performance has exceeded 10%.

Africa :30% of wealth held abroad; Russia:52%; Gulf countries: 57%; Europe:10%; US and Asia:4%

Foreign Account Tax Compliant Tax (FATCA): passed by Congress and Obama’s administration in 2010 – Financial institutions throughout the world must identify US clients and inform the IRS to ensure that tax on interest income, dividends and capital gains are paid. Foreign banks refusing to disclose accounts held by US taxpayers face sanctions: a 30% tax on all dividends and interest income paid to them by the US. Tax havens can be forces to cooperate if threatened with large-enough penalties.

To believe that tax havens will spontaneously give up managing the fortunes of the world’s tax dodgers, without the threat of concrete sanctions, is to be guilty of extreme naïveté.

The IRS signed a check for $104 million to the ex-banker of UBS, Bradley Birkenfeld, who revealed the practice of his former employer.  But one may well doubt the effectiveness of this strategy as to rely exclusively on whistle blowers to fight against tax-havens is not strong policy.

The EU saving tax directive, applied in the EU since July 2005 is to fight against offshore  tax evasion by sharing information between countries about clients. Yet this was a failure: Lux and Austria were granted favourable terms and do no exchange information with the rest of Europe. Lux could give the persistence of banking secrecy in Switzerland to block any revision of the directive. Lux and Austria instead of sharing information must apply a withholding tax (35%) which is less than the top marginal income tax in France. Then the tax applies only to EU owners, not to accounts held by shell corporations, trusts or foundations. And the directive applies only to interest income, not dividends. Why? This is a mystery. Was it incompetence? Complicity? The main effect has been to encourage Europeans to transfer their wealth to shell corporations (+10% in Switzerland, in the months that followed the entre into force of the Directive). Swiss bankers have deliberately torpedoed the saving tax directives. No sanctions, no verifications foreseen…it is high time to wake up to reality.


Treasure Islands, Nicholas Shaxson, 2011

Image result for nicholas shaxson treasure islands

More than half of the world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of FDI by multinational corporations are routed offshore. Some 85% of international banking and bond issuances takes place in the so-called Euromarket, a stateless offshore zone.  IMF estimated that in 2010 the balance sheet of small island financial centers added up to US$ 18 trillion, a third of world’s GDP.

A tax haven might offer a zero tax rate to non-residents but tax it own residents fully. This ring fencing between residents and non-residents is a tacit admission that what they do can be harmful.

Another way to spot a secrecy jurisdiction is to look for whether its financial services industry is very large compared to the local economy. The IMF uses this tool in 2007 to finger Britain as an offshore jurisdiction.

Transfer pricing : by artificially adjusting the price for internal transfer, multinationals can shift profits into a low-tax haven and costs into high-tax countries where they can be deducted against tax….Sometimes the prices of these transfers are adjusted so aggressively that they lose all sense of reality: a kilogram of toilet paper from China has been sold for US$4,121, a liter of apple juice has been sold out to Israel at US$2,052; ballpoint pens have left Trinidad values at US$8,500 each. Most example are far less blatant (unclear why unit price is high – transfer pricing works with product sold to offshore company at production price (to avoid taxes) and those product are resold to buying country at a price just lower the market price, so that profit in the selling country are small (and therefore not taxed much). The large difference between purchase and selling price is in the offshore country – not taxed).

Developing countries lose an estimated US$160 billion each year just to corporate trade mispricing of this kind.

The world contains about 60 secrecy jurisdictions, divide into 4 groups: Europeans, the British zone centered on the City of London, US influence zone and the fourth include some oddities (Somalia, Uruguay….)

In Europe, Switzerland, since at least the 18th century, sheltered the money of European elites. Netherland is a major tax haven. 20 times Dutch GDP ($18 trillion) flowed through Dutch offshore entities in 2008. Bono shifted his band’s financial empire to Netherland in 2006, to cut its tax bill.

Luxembourg is among the world biggest tax haven: North Korea Kim Jong Il has stashed some 4 billion dollars in Europe.  Luxembourg, South Korea Intelligence said in 2010, is a favoured destination for this money.

The second group, accounting for half of the world secrecy jurisdiction, is the most important and centred on the City of London. Jersey, Guernsey, Isle of Man, Cayman island, all substantially controlled by Britain, but also Hong Kong, Singapore; Dubai, Ireland, Vanuatu which are deeply connected to the City of London. This network account for almost half of the international bank assets.

The third group:  US is now, by some measures, the world’s single most important tax haven in its own rights, with a three tier system. At federal level: Tax exemptions, secrecy provisions, US banks may accepts proceeds from a range of crimes as long as the crimes are committed overseas. Individual US states offer a range of offshore lures: Florida, Wyoming, and Delaware with strong and unregulated corporate secrecy. And a network of islands such as Virgin Islands, Liberia, Marshall Islands (flag of convenience, managed by a private firm in Virginia, after a shipping registry was developed in 1986 with USAID support. Deep Water Horizon was registered in Marshall Islands. A small opaque tax haven grew alongside the shipping registry. Forming a Marshall Islands company can be done in a day for $650 and names of directors and shareholders are not mandatory in the registration process…),Panama, the biggest US influenced haven, a black hole that has become one of the filthiest money laundering sinks in the world.

Offshore finance has quietly been at the heart of the Neoconservative schemes to project US power around the globe.

The most important tax haven in the world in an island: the island of Manhattan. The second biggest is located on an island: London.

The difference between tax avoidance (legal but getting around the intent of elected legislature) and tax evasion (illegal) is the thickness of a prison wall.

US corporations paid about 2/5 of all US income taxes in the 1950’s; that share has fallen to 1/5. The top 0.1% of US taxpayers saw their effective tax rate fall from 60% in the 1960 to 33% in 2007. Billionaire Warren Buffet found that he was paying the lowest tax rate among his office staff, including the receptionist.  Overall taxes have not declined, the rich have been paying less and everybody else has had to take up the slack.

Russian dirty money favors Cyprus, Gibraltar, Nauru, all with strong British links. Much foreign investment in China goes via the British Virgin Islands.

A drug dealer may have money in a bank account in Panama. The account is under a trust set up in Bahamas. The trustees may live in Guernsey and the trust beneficiaries could be a Wyonming corporation with directors that are professional nominees who direct hundreds of similar companies. They have company lawyers, or trustees can be lawyers themselves, who are prevented by attorney-client privilege from giving out any details. Some trust may even have a flee clause: the moment an enquiry is detected, the structure flits to another secrecy jurisdiction and assets will automatically hop elsewhere.  Hong Kong is preparing legislation to allow incorporation and registration of new companies within minutes….

In 2005 Tax Justice Network estimated that wealthy individuals hold perhaps $11.5 trillion worth of wealth abroad. It is about ¼ of global wealth and equivalent to GNP of the US. This is $250 billion of taxes lost (2 or 3 times the size of the aid budget). And this is just individuals, not corporations…


Global Financial Integrity programme (Center for International Policy in Washington) calculated that $1.2 trillion in illicit financial flows in 2008 from developing countries. For every dollar of aid money, the west has taken back $10 of illicit money under the table.


Eurodad has a book called Global Development Finance: illicit flow report 2009 which  seeks to lay out every comprehensive official estimate of global illicit international financial flows: every page is blank.

The global offshore system helped generate the latest financial and economic crisis since 2007. 1 -By helping financial corporations to avoid regulation, offshore system helped them grow explosively, achieving “too big to fail” status and gaining the power to capture the political establishment in Washington and London. 2-As secrecy jurisdiction degraded their own financial regulations, they forced onshore jurisdiction to compete in a race towards ever laxer regulations. 3- huge illicit cross border flows (much of it unmeasured) have created massive net flows into deficit countries (US, UK) adding to the more visible macroeconomic imbalances that underpinned the crisis. 4- offshore incentives encouraged companies to borrow far too much. 5- As companies fragmented their financial affairs around the world’s tax haven, this created complexity which fed the mutual mistrust between market players that worsened the financial crisis.

Before WWI Britain did not tax profits made overseas. When war broke out, income taxes rose from 6% in 1914 to 30% in 1919 and Britain started to tax companies on their income worldwide.

The UN produced a draft model tax treaty in 1980 that was supposed to shift the balance back in favour of source countries and developing countries. The OECD intervened aggressively to stop this to ensure its own model treaty favoring rich country remained the preferred standard.  The rich country model has achieved a position of near-total dominance today. Not only is there double non-taxation, but plenty of tax that would in a fairer world be paid in poor countries is paid in rich country instead.

Trusts emerged in the middle ages when knights leaving for the crusades would leave their possessions in the hands of trusted stewards, who would look after them while they were away on the behalf of the knights’ wives and children. Trusts are secrets between lawyers and their clients. When a trust is set up the original owner of an asset in theory gives it away to a trust:  the trustee becomes the legal owner of the asset and must obey the terms of the trust deed. Even if the original owner dies, the trust remains and trustee is bound by law to follow its instructions. British upper classes feel comfortable separating themselves from their money and leaving it to be managed by trusted strangers (a cultural issue). Their education prepares them to recognize those would will respect their claims and whom they can trust.

Many of the structured investment vehicles that helped trigger the latest economic crisis were set up as offshore trusts, with several trillion dollars’ worth worldwide shrouded in deep secrecy.

A pervasive story exists that Switzerland put bank secrecy into place to protect German Jewish money from the Nazis. It is a myth. Amid the great depression (early 30s) workers called for more control over the banks. Bankers pressed fiercely for a new law to make it a crime to violate Swiss bank secrecy. The law was passed in 1934 making violation of bank secrecy a criminal offence. Swiss financial secrecy has existed for centuries. Catholic French kings valued Geneva’s bankers’ discretion highly – it would have been disastrous for it to be known they were borrowing from heretical Protestants.

‘It’s no use to pressuring the Swiss government, to get change, you must pressure the bank’, as demonstrated by the agreement between the US and UBS to share information on 4000 American account holders in 2010.

In 1929, culmination of a long period of deregulation and economic freedom, the richest 24,000 Americans received 630 times as much income on average as the poorest 6 million families, and the top 1% received nearly a quarter of all the income – a proportion slightly greater than the inequalities at the onset of the global crisis in 2007.

When bonds and shares are first issued, they flow into productive investment. This is generally healthy. Next a secondary market appears, where these shares and bonds are traded. These trades do not directly contribute to productive investment: they merely shuffle ownership. Well over 95% of purchases in global market today consist of this kind of secondary activity, rather than real investment. Shuffling ownership of bits of paper ought to help capital flow to those projects that offer the highest returns. A little speculative trading in these markets improve information and smooth prices. But when the volume of this dealing is a hundred times bigger than the underlying volume of trade, the result had proved to be a catastrophe.

From 1950 to 1973 annual growth rate amid widespread capital controls (and extremely high tax rates) average 4% in America and 4.6% in Europe. Per capita income in developing countries grew by a full 3% in the 60s and 70s, far faster than the rate since then. In the 80s, as capital controls were progressively relaxed around the world and tax rates fell and offshore system really began to flower, growth rates fell sharply. Countries that have grown most rapidly have been those that rely least on capital flow. Financial globalization has not generated increased investment or higher growth in emerging countries.

We msut be cautious about inferring too much from these facts, other reasons exists for high growth rates…but it shows that it is possible for countries to grow quickly while under capital control.

What has happening since the 1970s is financial liberalization on steroids: the offshore system has served as accelerator for flighty financial capital, bending capital flows so that they end up not where they find the most productive investment, but where they can find the greatest secrecy.

The Mont Pelerin society (1947, challenge to Keyne incubated in Switzerland –the world premier tax haven at the time): foundation of the global fightback against Keynes. “We must raise and train an army of fighters for freedom” Hayek. One attendee was Friedman, whose subsequent work inspired Thatcher and Reagan.

In 1957, the Pound Sterling still financed about 40% of world trade. With the empire crumbling and the pound sterling started to totter, this role was in great peril. Britain wanted to stop capital draining away by curbing bank’s overseas lending. The City objected and threatened to bankrupt the government. Curbing on lending would eventually apply to pound sterling loans by London merchant banks only. These bank – for which the international lending business was vital – simply shifted the international lending from pound to dollars. The Bank of England deemed that those transactions not to take place in the UK (as in foreign currency) and did not regulate those (as regulations would mean admission of responsibility, it was better not to regulate those markets!). While the Euromarket was undermining US control over the dollars, the US did nothing to stop its banks to work on the Euromarket. In the 1960, experts thought that the market would gradually disappear as soon as interest rates in the US would rise to European levels. In addition, the US banks wanted to keep this offshore system as quiet as possible – it was not a political issue before 1975…Eurodollars helped the US finance its deficits, fight foreign wars and throw its weight around. This was the birth of the Eurodollars and Euromarkets (which actually are not link to the Euro and exist in all main world currencies – not only dollars). Euromarkets are a booking exercise: banks would record onshore any transaction involving at least one British party, and would record of offshore operations where neither parties was British. Moscow Narodny Bank was the first on that market: Moscow was not comfortable keeping its dollars in New York in the middle of the Cold War and preferred to keep those dollars in London instead: a Marxist nation was nurturing the most unfettered capitalist system in history!  And as the sterling ship sank, the city was able to scramble aboard a much more seaworthy young vessel, the Eurodollar – the City transformed itself into an offshore island.  Before the 60s , countries were relatively well insulated against financial calamities that happen elsewhere, but the Euromarket connected up the world financial sectors and economies…as it grew, tides of hot money began to surge back and forth across the globe.

Starting with 200m in 1957, the euromarket kept booming. By 1970 it was measured at 46bn and by 1975 it was reckoned to have grown to exceed the size of the entire world’ foreign exchange. This market was the route through which the oil rich state surpluses (from the oil shocks) were routed to deficit plagued consumer countries. Market reached 500bn in1980, 2.6tn in 1988. By 1997, 90% of all international loans were made through this market. It is not anymore measured by the Bank of International Settlement…Every now and then government tried to tax this market – and failed. There are always technical details that allows the business to continue to flourish – it is considered a the most momentous financial innovation since the banknote, but it is very little researched.

In the Euromarket in London, the banks are not required to hold any reserve (it is unregulated, although most banks do have their own set of rules). Bank can create as much money as they want: the first $100 deposit will turn into a lending of $100, which turn into another deposit of $100 etc. etc. It never happened quite like that and there has been huge controversy about how much the Euromarket has really contributed to expanding the amount of money – since the Bank of International Settlement has stopped measuring it, we won’t know. With unlimited money creation, credit will expand into places where it was not previously able to, in more risky business. Euromarkets made it possible for credit quality to deteriorate out of sight of the regulators.

[ not a quote: In short an attempt to regulate the financial sector and control the flow of money lent to the rest of the world by London based banks led to the creation of the largest unregulated financial market (the euromarket) which contributed significantly to the financial crisis by allowing uncontrolled money creation and spread of the crisis to all financial sectors worldwide.]

The loan-back technique: mobster would move out money from the US in suitcases, put it in secret swiss account, the bank would loan back to the mobster in the US. The mobster can even deduct loan interest repayment from its taxable income…

The US Volcker commission probing the assets of dead Jews found an internal memo from a large Swiss bank that creaming off money from dead people’s account was the usual way to accumulate reserves. Not only this: in secrecy jurisdiction, depositors willingly accept below market interest rates, in exchange for secrecy. It is hardly a surprise that banks became so interested in offshore private banking.

Global Financial Integrity study (2010) between 1970 and 2008, illicit financial outflow from Africa were approximatively $854bn. Total illicit outflow may be as high as $1.8tn. Developing countries lost up to a trillion dollars in illicit outflows just in 2006 – that is 10 dollars for every dollar of aid flowing in.

Univerist of Massachussetts in 2008: real capital flight over 35 years in 40 african countries from 1970 to 2004 is about $420bn – $607bn with interest earnings. Yet the total external debt was only 227bn. Africa is a net creditor to the rest of the world and its assets vastly exceeds its debts. But these assets belong to a narrow elite, while public debt are born by the people.

The rise of the third world lending in the 70s and 80s laid the foundations for the global tax haven network that now shelter the most venal citizens. Some suggest that at least half of the money borrowed by the largest debtor countries flowed right out again under the table. Third world debt were match almost exactly by the stock of private wealth their elite had accumulated in the US (in 1990s). Loans to Russia to deal with nuclear safety in 1990’s all disappeared…For Mexico, Argentina, Venezuela, the value of their elites offshore wealth was several times their external debt. Today the top 1% of households in developing countries own an estimated 70-90% of all private financial and real estate wealth.

Wealthy foreign investors buy up distressed sovereign debt at pennies on the dollar – typically at a 90% discount – then reap vast profits when those debts are repaid in full. One trick is to make sure that influential locals are secretly part of the investor buying the discounted rate. They help make sure the debt gets repaid. Their involvement must be hidden behind the shield of offshore secrecy.

If we consider that $18tn flowed through the netherland in 2008, just one of the many conduit havens, it is not unreasonable to estimate to tens of even hundreds of bn dollars of tax revenue are at stake for developing countries.

In 2007, the two biggest sources of foreign investment in China were not japan or the US but Hong Kong and British Virgin islands. The biggest source for investment in India is not the US or Britain or China but Mauritius, a rising star in the offshore system. A wealthy indian will send his money to Mauritius, then disguised as foreign investment, is being returned to India. The sender can avoid Indian tax on local earnings, and also use the secrecy to build monopoly by disguising the fact that a diverse array of competitors in the market is in fact controlled by the same interest.

Delaware State, in the 80’s: Chase Manhattan and JP Morgan banks hired an expert to draft the tax law and help convince the state to adopt it. The law was drafted without any analyses of a Delaware official. The law was to remove interest rate ceiling (which were in place for 200 years, law against usury) on credit cards, on personal loans, car loans and more. Banks would have powers to foreclose on people’s homes if they faulted on credit card debts, they could establish places of business overseas or offshore, and they got a regressive state tax structure to boot. And crucially, this was to be rolled out across America. The fact that Delaware law could be enacted in other states is a sign of health competition…critics says this illustrates the ability of powerful private interests to pass laws with national ramifications by singling out and exploiting the weakest and most malleable states.

Because it is small, Delaware can take advantage of opportunities, they are small, they move fast and can fill the void. They can give bankers what they need faster than anyone else. Delaware’s legislature is for hire.

Credit card debt, money market funds and numerous other instruments that fueled the borrowing binge and the crisis – the deregulation of interest rates had effect that are incalculable and is seen as one the single most important cause of the 2007 crisis.

[Not a quote: in short, the removal of interest rate cap in Delaware, led banks to do better business there and the law to be exported to other states. This led to massive credit card debt ( e.g. consumers credit card debt and loans against homes to pay credit card bills) and creation of money market funds (which supplied banks with money) were key source of the 2007 crisis. ]

Delaware became a major player in the securitization industry – the business of parceling up mortgages and other loans, and repackaging the debt and selling them on. Delaware again simply established the exact legal framework that corporation desired.  The 1981 law contained a section exempting ‘affiliated finance companies’ from all state taxes. These company act like bank but are not formally banks so fall outside financial regulations. They are part of the global shadow banking system that dragged the world into economic crisis from 2007.

In 1988 the statutory trust act which provide protection of trust assets from creditors. This made Delaware the top jurisdiction for setting up so-called balance sheet CDOs (collateral debt obligations) which allowed banks to offload their assets onto other investors, another important contributor to the crisis.

Limited liability:  since the middle of 19th century: if a limited liability company goes bust, owners and shareholders may lose the money they invested, but their losses are limited to that: they are not liable for the additional debts the corporations has racked up. This was introduce to encourage people to invest. In exchange companies must have their account properly audited, and these audit published, to keep the risk manageable.

A partnership: responsibilities on losses and debt in full, lower taxes and accounts are private and undisclosed.

Jersey introduced the Limited Liability Partnership: the partnership allows less disclosure and the LL protection altogether. This is an example of having the cake and eating it. When debt are not covered, they end up being covered by the government, ultimately people’s taxes. With all audit company moving to LLP status (in UK, Aus, NZ…), it diluted auditor’s incentives to take care with their accounting. Had auditors personally faced getting into big trouble when they screwed up, they might not have been so hasty to sign off on all the off-balance sheet financing.

IMF 2010 report shows that funding flows related to Greece crisis from 15 main countries: barring France and Germany, all are major secrecy jurisdiction.

Banks achieved a staggering 16% annual return on equity between 1986 and 2006, and the banks are now big enough to hold us all to ransom. Unless taxpayers give them what they want, financial calamity ensues. This is the too big to fail problem- courtesy of offshore.

Remoteness between ownership and operation is an evil in the relations among men. (Keynes) This is the flaw in the grand bargain at the heart of the globalization project. [in relation to ownership that is transferred from owner to owner by finance institutions, with no link with the real operation in the economic world]

In 1998, the OCED new project was the first serious and sustained intellectual assault on the secrecy jurisdictions in world history.  The Coalition for Tax Competition, at the Cato Institute, was set up to counter the move.

A branch of economics known as public choice theory which rejects the notion that politicians act on the behalf of people and societies and instead look at them as self-interested individuals. James Buchanan and Vernon Smith, economists, studies this.

The rich have seen their wealth and income soar. They also shifted their income out of personal income tax category into corporation tax, to be taxed at far lower corporate tax rates.The richest 400 Americans in 1992 booked 26% of their income as salaries and 36% as capital gains. By 2007, they recorded 6% as salaries and 66% as capital gains. The same happened in all high-income categories and in all OECD countries since at least the 1970s. IN contrast, working population has seen its personal income taxes and social security contributions rise over the last 30 years.

Between 1990 and 2001, corporation tax revenues in low income countries fell by 25%. This is especially troubling because developing countries find it much easier to tax a few big corporations than millions of poor people.

IMF study in 2009 concluded that tax incentives, which are supposed to attract investors, slash tax revenues but do not promote growth.

In the golden age of 1947-1973 the US economy grew at nearly 4% a year, while top marginal tax rate was between 75 and 90%. Those tax rates did not cause that growth, nut high taxes didn’t choke it either.

It is inequality, rather than absolute level of poverty and wealth, that determines how society fare on almost every single indicator of well-being.

The low income countries that have been growing the fastest, like China, tend to be those that have exported capital, not imported it.

The best way for countries to share information is through the so-called automatic exchange of information, where they tell each other about their taxpayers’ financial affairs. This happens inside Europe and in a few other countries. But there is another way of sharing information, ‘on request’: a country will agree to hand over information but only on a case by case basis, only when specifically asked and only under very narrow conditions – the requested must be able to demonstrate why they need the information. In other word, the requester must already know, more or less, what it is [they are looking for]. No fishing expeditions are allowed.  You can’t prove criminality until you get the information, and you can’t get the information until you prove criminality.

The human factor of life of offshore: There is something about island life that stifles dissent and encourages the pervasive groupthink. ‘An enemy on an island is an enemy forever’ There is no blending into anonymous background, no neighboring society to shift toward. Islanders are required to watch their step, moment by moment. The ability to sustain an established consensus and suppress troublemakers makes islands especially hospitable to offshore finance. The local establishment can be trusted not to allow democratic politics to interfere in the business of making money [which in general benefit the islands but is to the detriment of the rest of the world]

In small jurisdictions – not necessarily islands- it is so easy for collective inferiority complexes to emerge, where residents come to see themselves as defenders of local interests against the predations of bigger, bullying neighbors.

In tiny states, everyone knows everyone else, and conflicts of interest and corruption are inevitable.

When Irish musician Bono, for years the world’s most prominent poverty campaigner, shift its financial affairs to Netherlands to avoid tax and is still warmly welcomed in society, the battle seems lost.

The shadow banking system: structured investment vehicles, asset-backed commercial paper conduits and other unregulated structures whose assets, by the time of the crisis in 2007, were greater than the entire $10tn US banking system, and which nearly brought the world economy to its knee.

In 1997, the Labour gave the Bank of England its operational independence, a gift of economic and political power to the City, the most radical shake up of the Bank in its 300-year history.

London has more foreign banks than any other financial center: by 2008 it accounted for half of all international trade in equities, 70% of Eurobond turnover, 35% of global currency trading and 55% of international public offerings. New York was bigger in areas like securisation, insurance, mergers and acquisitions and asset management, but much of its business is domestic, making London the world’s biggest international – and offshore – financial hub.

Richard Branson, who owns his business empire through a maze of offshore trusts and companies, said in 2002 that his company would be half its size if it had not legally avoided tax via offshore structures.

International Accounting Board Standard (IASB) sets the rules for how companies around the world publish their financial data. Over one hundred countries use these standards. Its rule let multinational corporations consolidate results in different countries into one single figure.  There is no way to unpick the numbers to work out profit in each country. Given that 60% of world trade happens inside multinational corporations, this is massive opacity.  The IASB is not a public rule-setting body, accountable to democratic parliaments; it is a private company registered in Delaware, financed by the big four accountancy firms and some of the world’s biggest corporations. This is an example of privatization of public policy making.

The City of London is the oldest continuous municipal democracy in the world, the Corporation boast. It dates from 1067 and is rooted in the ancient rights and privileges enjoyed by citizens before the Norman Conquest in 1066. It has remained a political fortress withstanding tides of history. Britain’s rulers have needed the City’s money and given the City what it wants in exchange.

The Bank of England, like other financial regulators, answers to Parliament, not to the Corporation, but its physical location at the centre of City reflects where its heart lies.

When the Government launched an inquiry in 2008 into the financial crisis, every single one of the team’s 21 members had background in financial services. It was hardly a surprise when the report recommended no real changes.

English libel laws are among the comforts for those with dirty money who come to London. There is no constitutional protection for free speech and the burden of proof is deposited squarely on the shoulder of the defendant, unlike nearly everywhere else. Libel litigation in England and Wales cost 140 times the European average. Many things in this book have been self-censored. Effective change in the law would significantly weaken Britain’s offshore empire.

In Britain, 0.3% of the population owns 2/3 of the land, in famously unequal Brazil, 1% of the population owns half of the land.

Until 1970’s offshore explosion, UK banks expanded their balance sheet cautiously, in line with spending in the economy, and combined they were worth half of the GDP. In the beginning of twenty-first century their balance sheets had grown to over 5 times of GDP.

Ancien regime in France fell in the 18th century because the richest country in Europe, which had exempted its nobles from taxation, could not pay its debt.

Recommendations: The veil of silence and ignorance can be lifted; blacklisting of havens; country by country accounting reporting for big corporations; automatic information sharing between countries; priorities the needs of developing countries; focus on improving tax systems in developing countries; confront the British spider web, the most aggressive single element in the global offshore system; new taxation approach based on the substance of what they do in the real world, rather than on the legal fictions its accountants have cooked up; Onshore tax reform with focus on land and land rental value which encourage the best use of land – and proof against offshore escape. Other focus should be on mineral rich countries with oil money sluicing into the offshore system, distorting the global economy; tax and regulate the financial industries according to an economy’s real needs – ignoring the threat of relocation offshore by companies; tackle the intermediaries and private users of offshore (e.g. pressure on banks, not only on governments); corporate responsibility – limited liabilities is a privilege for instance, corporations can be held to a set of obligations to the society (notably transparency). Offshore undermined this: privilege are still there but obligations have withered; Reevaluate corruption, it worsen poverty and inequalities. Parallels between bribery and the business of secrecy is no coincidence – we are talking about the same thing; change the culture: pundits, journalist, politician can not fawn over people who get rich by abusing the system. Professional associations of lawyers, accountants and bankers need to create code of conduct to prevent assisting financial crimes.

Capital in the Twenty-First Century – Thomas Piketty (2014)




When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.  There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest take precedence over private interests…

Whenever one speaks about distribution of wealth, politics is never very far behind.

In 1798, Malthus, like his compatriots, was very afraid of new political ideas emanating from France, and to reassure himself that there would be no comparable upheaval in Great Britain he argued that all welfare assistance to the poor must be halted and that reproduction by the poor should be severely scrutinized. It is impossible to understand Malthus’s exaggeratedly somber predictions without recognizing the way fear gripped much of European elite in the 1790s.

Kuznets (1953) noted a sharp reduction in income inequality in the US between 1913 and 1948. In 1913, the upper decile of the income distribution (the top 10% of US earners) claimed 45-50% of annual national income. By 1948, the share had decrease to 30-35%. This was considerable and equivalent to the share of the poorest 50% of Americans. Inequality was shrinking. According to the “Kusnets curve” inequality can be expected to follow a “bell curve”. It should first increase and then decrease over the course of industrialization and economic development, as a larger and larger fraction of the population partakes of the fruits of economic growth. The data and the theory became a powerful political weapon in the context of the cold war: the intent of his optimistic predictions was quite simply to maintain the underdeveloped countries within “the orbit of the free world”.  The Kuznets’s curve theory was formulated in large part for the wrong reasons. The sharp reduction in inequality was due above all to the world wars and violent economic shocks they entailed. It had little to do with the tranquil process of intersectoral mobility described by Kuznets.

WTIP : world top income database

Just as income tax returns allow us to study changes in income inequality, estate tax returns enable us to study changes in the inequality of wealth.

First conclusion: one should be wary of any economic determinism in regard to equalities and wealth and income. The history of distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms.  The reduction of inequality between 1910 and 1950 was due to wars and policies to deal with shocks. The resurgence of inequality after the 1980 was largely due to the political shifts in regard to taxation and finance.

Second conclusion: the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.

The main forces for convergence are the diffusion of knowledge and investment in training and skills. The emergent economies are now in the process of catching up with the advanced ones by adopting modes of production of the rich countries and acquiring skills comparable to those found elsewhere.

The forces of divergence? First, top earners can quickly separate themselves from the rest by a wide margin. More importantly there is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital high. This is the principal threat to an equal distribution of wealth over the long run.  It is not out of question that those two forces of divergence come together in the 21st century. This has already happen to some extent and may yet become a global phenomenon, which could lead to level of inequality never seen before. The top decile in the US claimed 45-50% of the national income in 1910-20; 30-35%  from the 1940s to 1970s and rapidly rose from 1980 to 45-50% in 2000s.  This spectacular increase in inequality reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population. These top manager by and large have the power to set their own remuneration, sometimes without limits and in any case without any clear relation to their individual productivity.

In slow growing economies, past wealth naturally takes on disproportionate importance, because it takes only a small flow of new savings the stock of wealth steadily and substantially. When the rate of return on capital significantly exceeds the growth rate of the economy, then it logically follows that inherited wealth grows faster than output and income. It is almost inevitable that inherited wealth will dominate wealth amassed in a lifetime’s labor and the concentration of capital will attain extremely high levels potentially incompatible with principles of social justice. It is possible to imagine public institutions and policies that would counter the effects of this logic: for instance a progressive global tax on capital.

It was not until the coming of the 21st century that the wealthy countries regained the same level of stock market capitalization relative to GDP that Paris and London achieved in the early 1900s.

It has been the demographic growth of the New World that has ensured that inherited wealth has always played a smaller role in the US than in Europe. This explain why the structure of inequality has always been so peculiar.[ US went from 3M at the time of independence to 300M today, France went from 30 million to 60 million in the same period. US is not the same country anymore. France example is more typical and pertinent for understanding the future. ]

Many commentators continue to believe that ever more fully guaranteed property rights, ever freer markets and ever purer and more perfect competition are enough to ensure a just, prosperous and harmonious society. Unfortunately, the task is more complex.

Capital/Labor split: at historically low level in the 1950’s, the growth of capital share accelerated with the victories of Margaret Thatcher in England in 1979 and Ronald Reagan in the US in 1980, followed by financial globalization and deregulation in the 1990’s. By 2010, despite the crises in 2007-2008, capital was prospering has it had not done since 1913.

National income: subtract from GDP the depreciation of capital that made the production possible (10% of GDP in most country) and add the net income received from abroad. A country that own a large portion of the capital of other countries may enjoy a national income higher than its domestic product.

In most rich countries the residents own as much in foreign real estate and financial instruments as foreigners own of theirs. France is not owned by Californian pension funds of the Bank of China. US does not belong to Japanese of German investors. The reality is that inequality with respect to capital is a far greater domestic issue than it is an international one.

Public wealth in most developed countries in currently insignificant: private wealth accounts for nearly all wealth almost everywhere.

Since the 1980s many countries have more or less balanced net asset positions, but those positions are quite large in absolute terms. Many countries have large capital stakes in other countries and those other countries also have stakes in the country in question, and the two positions are more or less equal, so net foreign capital is close to zero. Net income from abroad is just slightly positive in Japan, France, US, Britain, with 1-2% of GDP. Japan and Germany, whose trade surpluses have enabled them to accumulate over the past decades substantial reserves, have a net income from abroad at 2-3% of GDP. All continental blocs are close to equilibrium but for Africa where income is roughly 5% less than the continent output ( and 10% in some countries): this means that some 20% of African capital is owned by foreigners.

In developed countries today, the capital/income ratio generally varies between 5 and 6, and the capital stock consist almost entirely of private capital.

The population of the planet is close to 7 billion in 2012, and global output is slightly greater than 70 trillion euros, so that global output per capita is 10,000 euros. If we subtract 10% for capital depreciation and divide by 12, this yield an average per capita monthly income of 760euro. If the output was equally distributed each individual would have an income of 760 euros per month.

Sub Saharan Africa, with a population of 900 million and annual output of 1.8 trillion (less than the French GDP if 2 trillion) result in a per capita output of 2000 euro/year, the poorest economic region. China has 8000 euro/year.

The world clearly seems to have entered a phase in which rich and poor countries are converging.

The fact that rich countries own part of the capital of poor countries can have a virtuous effect by promoting convergence. Wealthy country residents will obtain better return on their investment by investing abroad, the poor country will produce more and close the gap between them and the rich countries. However this mechanism does not guarantee convergence of per capita income.  Then after the wealthy countries have invested in their poorer neighbors, they may continue to own them indefinitely: poor countries must continue to pay to foreigners substantial share of what their citizens produce (as African countries have done for decades).

None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments (Japan, South Korea, Taiwan, China).

Many studies show that gains from free trade come mainly from the diffusion of knowledge and from the productivity gains made necessary by open borders, not from static gains associated with specialization.

The poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill and education, not by becoming the property of the wealthy.

Growth: illusions and realities

The 21st century may see a return to a low growth regime.

According to the best available estimates, global output grew to an average annual rate of 1.6% between 1700 and 2012, 0.8% of which reflects population growth, while another 0.8% came from growth in output per head.

According to the UN forecast, the demographic growth rate should fall to 0.4% by the 2030s and around 0.1% in 2070, a rate similar to the low growth regime before 1700 and far from the spectacular peak of 2% of the 1950-1990.


A 2% growth rate is equivalent to a cumulative generational growth (over 30 year) of 81%. After 100 year, the wealth is multiplied by 7.

A stagnant or, worse, decreasing population increases the influence of capital accumulated in previous generations. The same is true for economic stagnation. Inherited wealth will make a comeback. On the contrary growth can increase social mobility for individuals whose parents did not belong to the elite generation. This phenomenon not only decrease income inequality but also limit the reproduction of inequality of wealth.

The end of growth: the key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5% over a lengthy period of time. A growth of 3-4% per year is illusory.

It was essentially inflation that allowed the wealthy countries to get rid of the public debt they owed at the end of World War II. Conversely, the wealth-based society that flourished in the 18th and 19th centuries was inextricably linked to the very stable monetary conditions that persisted over this very long period. Despite slight adjustments, the conversion rate between French and Britain currencies remained quite stable for two centuries (parities with gold and growth was slow so the amounts of money changed only very gradually over time). Until World War I money had meaning.

Today’s public debt is nowhere near the astronomical levels attained at the beginning of the 19th century, but it is at historical levels in France and some other countries and is probably the source of much confusion. Britain’s public debt attained extremely high levels, around 200% of GDP in only two occasion: after WWII and after the Napoleonic wars. While the French defaulted on 2/3 of its debt (in the 1800s) Britons who had the necessary means lent what the state demanded without appreciably reducing private investment: the debt was largely financed by increased private savings. It is quite clear that the very high level of public debt served the interest of the lenders- investing in government bond was good business for wealthy people. For over 100 years, British government did not repay the principal and only paid the annual interest due on the debt. The British budget was always in substantial primary surplus: tax exceeded expenditures by several % of GDP. It was only growth of GDP and income from 1815 to 1914 that ultimately allowed Britain to reduce its public debt (and never defaulted). After WWI, the inflation of the 1950s (4% a year) and of the 1970s (15% a year) help reduce the debt from 200% to a 50% of GDP ratio.

To simplify the total value of public debt increased over the long run to roughly 100% at the end of 20th century. This increase reflects the expansion of the economic role of the state, the development of ever more extensive public services (health, education) and infrastructures. The total value of public assets in France is 150% of national income.

In the 1980s started a wave of liberalization and deregulation. The memory of the Great Depression had faded. The stagflation of the 1970s demonstrated the limit of post war Keynesian consensus. With the end of the reconstruction and the Trente Glorieuse it was only natural to question the indefinitely expending role of the state and its increasing claims on national output. Privatisation, deregulation followed. Public wealth fell to very low levels and private wealth slowly returned to levels of the early 20th century. France totally transformed its national capital structure.

Capital in the US took some specific forms first because land was abundant and did not cost very much, second because of the existence of slavery and finally because of the [strong] demographic growth (accumulating smaller amount of capital).

In the 1850s, the low capital/income ratio in America (3 years of national income as opposed to 6-7 in Europe) signified in a very concrete way that the influence of landlords and accumulated wealth was less important in the New World. With a few years of work, the new arrival were able to close the initial wealth gap (more rapidly than in Europe).

The United States is more than 95% American owned and less than 5% foreign owned.

In 1770-1810, If one adds the market value of slaves to other component of wealth, the value of southern capital exceeds 6 years of southern states’ income, or nearly as much as the total value of capital in Britain and France. Conversely in the North, with no slaves, total wealth was quite small: 3 years of income (as much as in the south of Europe).

Note that the phenomenon of international cross-investments is much more prevalent in European countries (France, Britain, Germany) where financial assets held by other countries represent between ¼ and ½ of the total domestic financial assets (which is considerable), than in larger economies such as US or Japan (around 1/10). This increases the feeling of dispossession. People forget that while domestic companies and government debt are largely own by the rest of the world, residents hold equivalent assets abroad.

Return on capital, from the 18th to the 21st century oscillated around a central value of 4-5% a year whereas in the early 21st century only it seems to be approaching 3-4%.

Too much capital kills the return on capital: it is natural to expect that the marginal productivity of capital decreases as the stock of capital increases.

Numerous studies mention a significant increase in the share of national income in the rich countries going to profit and capital after the 1970s, along with a concomitant decrease in the share going to wages and labor (linked to new and useful things to do for capital, mobility of capital, competition between states to attract investment, opportunities to substitute capital to labor)

The only thing that appear relatively well established is that the tendency for the capital/income ratio to rise, as observed in rich country and might spread to other countries around the world if growth (especially demographic growth) slows in the 21st century, may well be accompanied by a durable increase in capital’s share of national income and a decrease in return on capital.

In 1900-1910 in France, Britain, Sweden, the richest 10% owned 90% of the nation’s wealth.The wealthiest 1% owned 50% of the wealth. In other words, there was no middle class. The emergence of a patrimonial middle class was an important, if fragile, historical innovation. To be sure, wealth is still extremely concentrated today: the upper 10% own 60% of Europe’s wealth (more than 70 in the US). And the poorer half of the population owns 5% of wealth (as in 1900-1910). Basically all the middle class managed to get its hands on few crumbs : scarcely 1/3 of Europe wealth and ¼ in the US. The rise of a propertied middle class was accompanied by a very sharp decrease of the wealth of the upper 1% (from 50% in Europe in 1910 to 20-25% in 2010).

Since 1980, income inequality has exploded in the US. The upper decile’s share increased from 30-35% in 1970s to 45-50% in 2000s. Early data from 2011-2012 suggest the increase is still continuing. Financial crisis as such cannot be counted on to put an end to the structural increase of inequality in the US.

The US : a record level of inequalities of income from labor (probably higher than in any other society at any time) together with a level of inequality of wealth less extreme than in Europe in 1900-1910. If both logic continue and combine their effects, the future could hold in store a new world of inequality more extreme than any that preceded it.

In practice the Gini coefficient varies from 0.2 to 0.4 in distribution of labor income in actual societies;  from 0.6 to 0.9 for distribution of capital ownership; from 0.3 to 0.5 for total income inequality. Scandinavia in the 70/80s of labor income was 0.19. Conversely, Belle époque Europe had a Gini Coefficient of 0.85, not for from absolute inequality. Coefficients, synthetic indices are inevitably misleading. It seems to me far better to analyze inequalities in terms of distribution tables indicating the shares of various deciles and centiles in total income and total wealth.

To sum up: the reduction of inequality in France during the twentieth century is largely explained by the fall of the rentier and the collapse of very high incomes from capital. No generalized process of inequality compression seems to have operated over the long run, contrary to the optimistic predictions of Kuznets’s theory.

There is no doubt that the increase inequality in the US contributed to the nation’s financial instability. One consequence of increasing inequality was the virtual stagnation of the purchasing power of the lower and middle classes, which made it more likely for modest household to take on debt. Banks, freed from regulation and eager to earn good yields on enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

It is important to note the considerable transfer of US national income (some 15%) from the poorest 90% to the richest 10% since 1980. This internal transfer between social groups is nearly 4 times larger than the impressive deficit the US ran in the 2000s (on the order of 4 point of national income). The trade deficit, which has its counterpart in China, Japan and Germany trade surpluses, is often describe as one of the key contributor to global imbalances that destabilized the US and global financial system. That is quite possible, but the internal imbalances are four times larger than the global imbalances. The place to look for solutions may be more within the US than in China or other countries.

The top thousandth in the US increased their share from 2% to 10% over the past decades. A share of 2% means people enjoy an income 20 times the average – 10% means people enjoy an income a 100 times the average. In France and Japan, the top thousandth share rose barely from 1.5% to 2.5% from 1980 to 2010. From a macroeconomic point of view, the explosion has thus far been of limited importance in continental Europe and japan. The rise is impressive but too few people have been affected to have had an impact as powerful as in the US where transfer of income to the 1% involve 10-15 points of national income.

In emerging and poor countries, tax data reveal much higher – and more realistic – top income levels than do household surveys. The highest incomes declared in household surveys are generally only 4-5 times higher than the average income.  The top centile share would be less than 5% of wealth. This is not very credible. Clearly household surveys, which are often the only source used by international organisations (WB) and government for gauging inequality, give a biased and misleading complacent view of the distribution of wealth.

Financial globalization seems to be increasing the correlation between the return on capital and the initial size of the investment portfolio, creating an inequality of returns that acts as an additional force for divergence in the global wealth distribution.

It is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.


According to Forbes, the planet boasted 140 billionaires in 1987  but counts more than 1,400 in 2013. They owned 0.4% of private wealth in 1987 and 1.5% in 2013 ($5.4 trillion). The average wealth of the group has increased from just over US$1.5bn in 1987  to US$15 bn in 2013n (6.4% a year, above inflation). For the sake of comparison; average global wealth per capita increased by 2.1% a year and world GDP by 3.3% (all after deduction of inflation). The amounts remain small but the rate of divergence is spectacular. If this continues, the share of these tiny groups (billionaires and 1/100 million fractile) could reach substantial levels by the end of 21st century. Only a progressive tax on capital can effectively impede such dynamic.

Approximate conclusions: Global inequality of wealth in the early 2010 appears to be comparable in magnitude to that observed in Europe in 1900-1910. The top thousandth seems to own nearly 20% of total global wealth, the top centile 50% and the top decile somewhere between 80 and 90%. The bottom half owns less than 5% of total global wealth. These estimates are highly uncertain.

The rate of inflation in the wealthy countries has been stable at around 2% since 1980. This is much lower than the peak inflation in the 20th century and much higher than the prevailing rate up to WWI.

Although the effect on inflation are complex, evidence suggests that the redistribution induced by inflation is mainly to the detriment of the least wealthy and to the benefit of the wealthiest.

Sovereign funds (imperfect estimates) from China; Hong Kong, Singapore, Dubai, Lybia, Iran, Azerbaijan etc. today own 1.5% of the world private wealth (same as the billionaires). The annual rent derived from exploitation of natural resources has been about 5% of GDP since 2000 (half of which is petroleum, the rest being gas, coal, minerals, wood…) compared with 2% in the 1990 and 1% in 1970s. If rate continue to increase – with the barril as high as $200 by 2020-2030, sovereign wealth funds could own 10-20% of global capital by 2030-40. No economic law rules this out but sooner or later this would trigger political reactions (restriction on purchase of real estate, industrial assets etc.). Petroleum rents might well enable the oil states to buy the rest of the planet (or much of it) and to live on the rents of their accumulated capital. China, India are different: they have a large populations whose needs remain far from satisfied.

In the future, the threat of gradual acquisition of rich countries by China seems less credible and dangerous than a process in which the rich countries would come to be owned by their own billionaires. The rich countries are not about to be taken over by the poor countries, which would have to get much richer and that would take many more decades.

Are the rich countries really poor? The net asset position of the rich countries relative to the rest of the world is in fact positive (rich countries own on average more than the poor countries) but is masked by the fact that the wealthiest residents of the rich countries are hiding some of their assets in tax havens (which can account for up to 10% of GDP, or 2-3 times more according to NGOs). [If one adds up financial statistics, poor and rich countries have a negative position : it seems that Earth must be owned by Mars]

The inequality r>g (return on capital>growth of income) implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tend to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduce itself faster than output increases. The past devours the future. The long term consequences are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake (the higher the stake, the higher the return) and that divergence are occurring on a global scale.

There is ample reason to believe that growth rate will not exceed 1-1.5% in the long run. Growth can be encourage by investing in education, knowledge and nonpolluting technology. But none of these will raise the growth rate to 4-5%. With a average return on capital at 4-5%, it is therefore likely that r>g will again be the norm for the 21st century, as it was until WWI. It took two world wars to reduce the return on capital, thereby creating the illusion that the structural contradiction of capitalism had been overcome.

If we are to regain control of capitalism, we must bet on democracy – and in Europe, democracy on the European scale. In small countries of Europe which will soon look very small indeed in relation to the global economy, national withdrawal can only lead to even worse frustration and disappointment than currently exist with the European Union. Nation state is the right level to modernize social and fiscal policies but only regional political integration can lead to effective regulation of the globalized pratimonial capitalism of the 21st century.