Thomas Piketty and Switzerland

Thomas Piketty, in Capital in the Twenty-First Century, offers a lot of ideas for new taxes, and suggests that coordination will be needed among EU nations to keep people from moving assets or themselves around to avoid those taxes. However, Piketty does not directly address the challenge presented by the existence of Switzerland.

Switzerland is a pleasant place to live (#3 in a world happiness ranking) and is a good central location for a multi-national company. According to, the government spends about 34 percent of GDP. France, on the other hand, has a government that spends “more than half of the domestic economy” (source) while the U.S. is in between at “slightly over 40 percent of GDP” (source). Switzerland has a minimal debt-to-gdp ratio compared to France and the U.S. (article). Switzerland can thus afford to operate indefinitely with its existing tax rates. Nowhere in Capital in the Twenty-First Century does Piketty ask or answer the question “Why wouldn’t companies and people faced with these new taxes just move to Switzerland?”

Piketty makes the case that top executives at big companies are overpaid:

we find that the size of the decrease in the top marginal income tax rate between 1980 and the present is closely related to the size of the increase in the top centile’s share of national income over the same period. Concretely, the two phenomena are perfectly correlated: the countries with the largest decreases in their top tax rates are also the countries where the top earners’ share of national income has increased the most (especially when it comes to the remuneration of executives of large firms). Conversely, the countries that did not reduce their top tax rates very much saw much more moderate increases in the top earners’ share of national income.

It is always difficult for an executive to convince other parties involved in the firm (direct subordinates, workers lower down in the hierarchy, stockholders, and members of the compensation committee) that a large pay raise—say of a million dollars—is truly justified. In the 1950s and 1960s, executives in British and US firms had little reason to fight for such raises, and other interested parties were less inclined to accept them, because 80–90 percent of the increase would in any case go directly to the government. After 1980, the game was utterly transformed, however, and the evidence suggests that executives went to considerable lengths to persuade other interested parties to grant them substantial raises. Because it is objectively difficult to measure individual contributions to a firm’s output, top managers found it relatively easy to persuade boards and stockholders that they were worth the money, especially since the members of compensation committees were often chosen in a rather incestuous manner.

Furthermore, this “bargaining power” explanation is consistent with the fact that there is no statistically significant relationship between the decrease in top marginal tax rates and the rate of productivity growth in the developed countries since 1980. Concretely, the crucial fact is that the rate of per capita GDP growth has been almost exactly the same in all the rich countries since 1980.

In contrast to what many people in Britain and the United States believe, the true figures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden.39 In other words, the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.

Considerable confusion exists around these issues because comparisons are often made over periods of just a few years (a procedure that can be used to justify virtually any conclusion).41 Or one forgets to correct for population growth (which is the primary reason for the structural difference in GDP growth between the United States and Europe). Sometimes the level of per capita output (which has always been about 20 percent higher in the United States, in 1970–1980 as well as 2000–2010) is confused with the growth rate (which has been about the same on both continents over the past three decades).

Our findings suggest that skyrocketing executive pay is fairly well explained by the bargaining model (lower marginal tax rates encourage executives to negotiate harder for higher pay) and does not have much to do with a hypothetical increase in managerial productivity.46 We again found that the elasticity of executive pay is greater with respect to “luck” (that is, variations in earnings that cannot have been due to executive talent, because, for instance, other firms in the same sector did equally well) than with respect to “talent” (variations not explained by sector variables).

Similarly, the idea that skyrocketing executive pay is due to lack of competition, and that more competitive markets and better corporate governance and control would put an end to it, seems unrealistic.

Our findings suggest that only dissuasive taxation of the sort applied in the United States and Britain before 1980 can do the job.

These findings have important implications for the desirable degree of fiscal progressivity. Indeed, they indicate that levying confiscatory rates on top incomes is not only possible but also the only way to stem the observed increase in very high salaries. According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.

Do not be misled by the apparent precision of this estimate: no mathematical formula or econometric estimate can tell us exactly what tax rate ought to be applied to what level of income. Only collective deliberation and democratic experimentation can do that. What is certain, however, is that our estimates pertain to extremely high levels of income, those observed in the top 1 percent or 0.5 percent of the income hierarchy. The evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior.

Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking.

here I will simply note that the United States is big enough to apply this type of fiscal policy effectively. The idea that all US executives would immediately flee to Canada and Mexico and no one with the competence or motivation to run the economy would remain is not only contradicted by historical experience and by all the firm-level data at our disposal; it is also devoid of common sense. A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. In order for the government to obtain the revenues it sorely needs to develop the meager US social state and invest more in health and education (while reducing the federal deficit), taxes would also have to be raised on incomes lower in the distribution (for example, by imposing rates of 50 or 60 percent on incomes above $200,000). Such a social and fiscal policy is well within the reach of the United States.

In other words, the top executives of a multi-national company currently headquartered in New York and getting paid (together) $100 million would just stay in New York and collect their $10 million after-tax salary (80 percent federal tax plus 10 percent for state and local). It would not occur to them that, since only 30 percent of their revenues came from the U.S., they might as well re-headquarter the company in Geneva and live there on about $60 million after taxes, flying back to New York, at shareholder expense, on the company Airbus A330 (executive configuration) whenever the mood struck. Plenty of Americans move in order to take better-paying jobs, even to places as culturally challenging as Saudi Arabia. Pregnant unmarried Americans will move 3000 miles so that their babies will be born in a jurisdiction where child support profits are higher (e.g., from New York to California, so that child support revenues in excess of $100,000 per year can be harvested). Piketty does not explain why business executives, whom he characterizes as manipulating their boards to enrich themselves at shareholder expense (a point that I have made as well!), would not be willing to move for a 6X after-tax pay raise.

In addition to a tax rate of at least 80 percent on higher incomes, Piketty proposes a “global tax on capital,” which he admits is unlikely to happen.

A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon. To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues.

a global tax on capital would require a very high and no doubt unrealistic level of international cooperation. But countries wishing to move in this direction could very well do so incrementally, starting at the regional level (in Europe, for instance). Unless something like this happens, a defensive reaction of a nationalist stripe would very likely occur. For example, one might see a return to various forms of protectionism coupled with imposition of capital controls.

Protectionism and capital controls are actually unsatisfactory substitutes for the ideal form of regulation, which is a global tax on capital—a solution that has the merit of preserving economic openness while effectively regulating the global economy and justly distributing the benefits among and within nations. Many people will reject the global tax on capital as a dangerous illusion, just as the income tax was rejected in its time, a little more than a century ago. When looked at closely, however, this solution turns out to be far less dangerous than the alternatives.

To my mind, the objective ought to be a progressive annual tax on individual wealth—that is, on the net value of assets each person controls. For the wealthiest people on the planet, the tax would thus be based on individual net worth—the kinds of numbers published by Forbes and other magazines.

For the rest of us, taxable wealth would be determined by the market value of all financial assets (including bank deposits, stocks, bonds, partnerships, and other forms of participation in listed and unlisted firms) and nonfinancial assets (especially real estate), net of debt. So much for the basis of the tax. At what rate would it be levied? One might imagine a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 and 5 million, and 2 percent above 5 million. Or one might prefer a much more steeply progressive tax on the largest fortunes (for example, a rate of 5 or 10 percent on assets above 1 billion euros). There might also be advantages to having a minimal rate on modest-to-average wealth (for example, 0.1 percent below 200,000 euros and 0.5 percent between 200,000 and 1 million).

The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.

Why is the goal of transparency so important? Imagine a very low global tax on capital, say a flat rate of 0.1 percent a year on all assets

it would generate information about the distribution of wealth. National governments, international organizations, and statistical offices around the world would at last be able to produce reliable data about the evolution of global wealth. Citizens would no longer be forced to rely on Forbes, glossy financial reports from global wealth managers, and other unofficial sources to fill the official statistical void.

The benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today—the future of the social state, the cost of the transition to new sources of energy, state-building in the developing world, and so on—because the global distribution of wealth remains so opaque. Some people think that the world’s billionaires have so much money that it would be enough to tax them at a low rate to solve all the world’s problems. Others believe that there are so few billionaires that nothing much would come of taxing them more heavily. As we saw in Part Three, the truth lies somewhere between these two extremes. In macroeconomic terms, one probably has to descend a bit in the wealth hierarchy (to fortunes of 10–100 million euros rather than 1 billion) to obtain a tax basis large enough to make a difference. I have also discovered some objectively disturbing trends: without a global tax on capital or some similar policy, there is a substantial risk that the top centile’s share of global wealth will continue to grow indefinitely—and this should worry everyone. In any case, truly democratic debate cannot proceed without reliable statistics.

An 0.1 percent tax on capital would be more in the nature of a compulsory reporting law than a true tax. Everyone would be required to report ownership of capital assets to the world’s financial authorities in order to be recognized as the legal owner, with all the advantages and disadvantages thereof. As noted, this was what the French Revolution accomplished with its compulsory reporting and cadastral surveys. The capital tax would be a sort of cadastral financial survey of the entire world, and nothing like it currently exists.2 It is important to understand that a tax is always more than just a tax: it is also a way of defining norms and categories and imposing a legal framework on economic activity.

Piketty has plainly persuaded a lot of readers regarding the benefits of surveying the world’s wealth and then taxing it directly. But he doesn’t explain how to force Switzerland to join this consortium of wealth taxers. Nor does he explain how, if Switzerland is not forced to join, how to prevent companies and individuals from relocating to Switzerland to escape from this new tax.

Maybe there is some way to make the rich stay put and hand over most of their income and wealth in taxes to whatever country they happen to be living in right now, but, if so, Piketty doesn’t say how to do it.


  1. Marcel Popescu

    May 29, 2014 @ 8:30 am


    “Maybe there is some way to make the rich stay put…”

    The North Korean way: deny them passports and threaten to shoot them and their families if they try to escape. Of course, they wouldn’t stay rich for long in that case.

  2. Matt Henderson

    May 29, 2014 @ 9:52 am


    Keep in mind that, at the individual level, American citizens can’t escape US tax laws, even by moving to another country. I read in the past that only two countries taxed their citizens regardless of residence — the USA, and North Korea — but since then North Korea has (I’ve heard) dropped the policy.

  3. jsc

    May 29, 2014 @ 10:20 am


    > Piketty does not explain why business executives, […], would not be willing
    > to move for a 6X after-tax pay raise.

    For US citizens, isn’t worldwide income subject to U.S. income tax, regardless of where you reside ?

    In that case it doesn’t make sense for a US top executive to move to Switzerland, right ?

  4. Alex

    May 29, 2014 @ 1:44 pm


    It’s interesting to see Piketty brazenly say that the point of a high top tax rate isn’t actually to raise money for the government, but simply to stop people from having high incomes. Does he argue elsewhere that, if prevented from giving millions of dollars to its top managers, corporations will instead spend that money on higher salaries for average employees? What’s to stop them from just sitting on piles of cash like Apple supposedly is doing?

    I have a friend who is an HR director for a small manufacturing business. He tells me about all the “soft benefits” that his company’s executives get, like a vacation timeshare. He also said that if income tax rates went back up to pre-80’s levels, you’d see a return of a lot of company benefits that have fallen out of fashion lately (like company cars).

    The rich are going to find a way to pay themselves.

  5. philg

    May 29, 2014 @ 3:34 pm


    jsc, Matt: Excellent points. However, an American could renounce his or her U.S. citizenship and take up Swiss citizenship in order to limit him or herself to Swiss tax rates. Europeans, who are sort of the main subject of Piketty’s book, would not have to change citizenship.

  6. John Klein

    May 29, 2014 @ 5:53 pm



    1) I worked in Germany in the 1990s and I never paid any U.S. taxes on my German income. I did have to fill out a 1040 EZ though.

    2) If I recall it correctly, If I were to go on sabbatical and stay out of the country for 11 months, then I am not subject to paying taxes up to a certain cap:

    Overseas sabbaticals. The federal government has the authority to tax the income of U.S. citizens even if it is earned outside of the country. However, the tax code creates a special exemption for certain income earned while living abroad and excludes some associated housing costs.

    Foreign-earned income can include money paid by a U.S. university to a professor living abroad. The income exclusion is subject to an annual inflation-adjusted cap that in 2010 stood at $91,500. Moreover, an additional housing cost exclusion amount is tied to the earned-income exclusion amount. IRS Form 2555 is designed to help calculate that sum.

  7. jay c

    May 30, 2014 @ 4:46 am



    if you live overseas, you can exclude your first $97,600 (in 2013) of income earned abroad (approx 70k Euros). When I stayed in Germany I met several American engineers who immigrated from Detroit area to work in the auto industry. I asked them about the US taxes and they said, a) they didn’t make more than 80-90k Euros source so the tax burden was not bad b) they didn’t have large deposits in German or Swiss banks c) they had investments like 401k in US so they wanted to remain on good terms with the US tax system. d) they like to fly to the US to visit their parents, and buy all of the stuff that is too expensive in Europe

    I looked at working in Germany and the amount of taxes I would pay vs. living in California was close. You pay about 11% more in taxes but health care is much cheaper (or you can get private insurance).

    As for why CEOs would not move to Switzerland, you would have give seats to the Union on your board of directors, really high salaries for executives are frowned upon, it makes it hard to pay off your Congressman except when he’s in Davos and all the best hookers are strictly for the OPEC set, not common CEO-folk.

  8. Matt Henderson

    May 30, 2014 @ 6:48 am



    Renouncing US citizenship can (if you are wealthy) subject you to a one-time “exit tax”, in which any assets you own are taxed for capital gains as if you had sold it all at the moment of renunciation.

  9. Matt Henderson

    May 30, 2014 @ 6:53 am



    A wealthy US person renouncing citizenship and taking up citizenship in another country, might look at Gibraltar’s “High Net Worth Individual” program — in which one is granted residence with the only requirement being the renting of an apartment on the rock. Those individuals are then subject to an absolute upper cap on taxation.

  10. Sam

    May 30, 2014 @ 8:58 am


    Phil, Interestingly Switzerland actually has a wealth tax in most cantons.

  11. philg

    May 30, 2014 @ 9:36 am


    Matt: For a 40-year-old C-level executive earning $10+ million per year, renouncing and paying capital gains on existing assets would generally be more cost-effective than paying 80 percent income tax for the next 30 years, no?

    Sam: Thanks for the link. Piketty does talk about some nations that have had wealth taxes, but what he is really interested in is one that is global. The Swiss tax link that you reference says the tax is on “assets located in Switzerland”. Piketty’s point is that the world’s governments need to figure out where everything is and who owns it and tax it. Anyway, if we assume that all assets ARE in Switzerland and that they yield a return of 3%, a 0.3% of wealth tax works out to a 10% tax on the dividend yield, which is still much less than the 80% income tax that Piketty proposes. (Alternatively, the 80% tax on the 3% works out to a 2.4% annual wealth tax).

  12. Matt Henderson

    May 30, 2014 @ 11:43 am


    Phil, I suppose if they could keep that $10m+ job, as a non-US citizen and performed from outside the US — then, for sure!

    BTW, it’s shocking how difficult the US makes things for its citizens living outside its boarders. For example, if you’re a US citizen and you own more than 50% of a foreign corporation, the US will tax you at the personal level on that corporation’s profits, whether or not the corporation has actually distributed any of those profits to you or not. See “Controlled Foreign Corporations”. (And that’s of course apart from steep fines of $10,000 if you happen to fail to report the existence of those corporations.)

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