Greetings. In a few days, countries are supposed to sign a treaty completing the reform of multinational corporate taxation. But as my colleagues report this week, this is unlikely to happen. That does not mean tax reform is dead. First, only one part of the reform requires a treaty agreement: the “pillar one” that reassigns which country may tax which part of the profits of multinational businesses. That will not prevent “pillar two” (of a global minimum floor for the corporate tax rate) from being put into effect; indeed, many countries have already done so. As for pillar one, any delay will free up countries to start imposing unilateral turnover taxes on big tech companies, which they had suspended during the tax reform talks.
The fact is that the global corporate tax system has largely been fixed with most loopholes removed, and it has been done in less than a decade. That’s the backdrop for the new focus on similar loopholes in the taxation of the wealthiest individuals. As I described in a column last month, the success of corporate tax reform has inspired Brazil, at present presiding over the G20 group of the world’s largest economies, to ask French economist Gabriel Zucman for ideas. This week, Zucman’s commissioned report landed. Below are my thoughts about his proposal. Do send me yours at [email protected].
The “blueprint”, as Zucman has titled it, is valuable for two reasons. It sets out a concrete proposal, which gives the G20 and others something specific to consider and build upon, and it sets out some important and under-appreciated arguments why improving the international taxation of the very richest is important.
Start with the latter question, of the rationale for this move. Zucman highlights a set of important facts about how and for whom wealth is generated as well as certain common features of tax systems. Neither is sufficiently well known, but even less widely understood is how they interact in a way to aggravate the problems of each.
Many know that global wealth concentration is rising. But not many appreciate the scale and speed at which this is happening. The estimated share of global wealth owned by the top millionth of people (about 3,000 billionaire households today) has gone from 4 per cent as late as in the early 1990s to more than 13 per cent today. Crucially, the growth in wealth of the wealthiest has been faster than for those of modest to middling wealth.
Even fewer people will know how regressive taxation is at the very top. One of Zucman’s crucial observations is that because the very wealthiest generate their incomes through their holdings in businesses, they have access to — and use — structures that keep increases in their wealth outside the tax net. For example, they can use holding companies as wrappers for their wealth and never realise income but borrow against assets to fund consumption. But on a broad definition of economic income, individual tax paid as a share of income falls steeply for the richest, to levels far below those paid by most people in Europe, and no higher than them in the US.
Most shocking is the combination of those facts. Zucman points out that as a matter of arithmetic, wealth inequality will not stabilise if either the returns to wealth are higher or those returns are taxed more lightly the wealthier you are. Both seem to be true. Which means that on current trajectories, there is reason to fear that wealth will become ever more concentrated.
Zucman’s answer, which G20 finance minister and leaders will now have to chew on, is a global minimum tax on the world’s 3,000 or so billionaires, assessed on their total net worth at a rate of 2 per cent per year. Zucman goes out of his way to insist this is not a wealth tax, but a “presumptive income tax” — a tool to fix the fact that normal income taxes are easy to avoid for the very richest. The suggestion is that because it is so hard to pin down the taxable income of the ultra-rich, we should just stipulate a certain rate of return — for example, a 2 per cent tax on wealth could be seen as a 33 per cent income tax on a presumed 6 per cent return.
Zucman may judge that this presentation is easier for some to stomach; there have been arguments that an actual wealth tax would face constitutional obstacles in the US. Zucman pre-empts this and points out that the 25 per cent “billionaires’ tax” on unrealised capital gains proposed in US President Joe Biden’s latest budget would meet the international standard of Zucman’s blueprint. Personally, I prefer to think of this as a wealth tax with a deduction for any individual taxes already actually paid. But the point that the basic idea could be implemented in many ways is welcome.
The upshot is that there are two main reasons for a global minimum standard for individual taxation of the ultra-rich: the unconscionable regressivity at the very top, and the very fast concentration of wealth. These are revenue-neutral justifications, as it were, for a global minimum tax on the wealthiest even if one wanted to use the proceeds to lower other taxes.
Beyond this, one can add the argument that governments everywhere confront a need to put more funding into defence, infrastructure and other investments for the carbon and digital transitions. The quarter of a trillion or so Zucman calculates could be raised annually would come in handy.
Zucman’s proposal for a presumptive billionaires’ income tax — or as I prefer to see it, as a billionaire’s wealth tax with deductibility for other taxes actually paid — seems as good a way as any to address these problems. Politically speaking, there is no reason this solution should be harder (not to say it would be easy) than any alternative. And in technical terms, I think this international “top-up tax” approach based on wealth is superior to trying to reform directly the problems with national income tax systems.
There are, of course, a host of well-known objections. There are good answers to all of them.
One is that it’s difficult to value wealth. In fact, Zucman says, half of the wealth of the richest is in the form of listed company ownership, which has easily observable market values. Most of the rest is in unlisted companies. For these, identifying owners is a matter of simple legislation, and valuation can be decided formulaically, based on company revenues and assets. What would be needed is improved collection of wealth-holding information and for it to be shared between countries; Zucman suggests that existing country-by-country profits reporting by listed companies should be supplemented by making large shareholders (including through legal intermediaries) known to tax authorities.
Another objection is that if you try to tax billionaires, they will leave. That is the conventional wisdom behind President Emmanuel Macron’s abolition of France’s previous wealth tax. But, in fact, this is an argument for an international minimum standard. That would give the ultra-rich fewer opportunities for moving out of the tax net and, as a result, would broaden the room even for unilateral tax moves by national governments by stopping a race to the bottom.
Of course, not all countries could be counted on to participate, especially those making a lucrative business out of luring the world’s billionaires with bespoke low-tax regimes for the ultra-rich. And the more countries that did participate, the easier they would find it to put in place anti-flight measures such as exit taxes, citizenship-based taxation (at least for this particular tax), or a continuation of tax liability for several years after moving away. Zucman suggests that on the model of the pillar two corporate tax reform, participating countries could assert a power of “tax collector in the last resort” on their prior residents who move to non-participating jurisdictions.
Another argument against wealth-based taxation is that some wealth is illiquid. Some legal claims against wealth taxes, and taxing of unrealised gains, are related to the alleged abuse of requiring taxpayers to pay a portion of cash they don’t actually have. Zucman brushes this aside by pointing out that for people whose net worth is counted in 10 or more digits, there is really not going to be a liquidity problem. But I would add that it’s perfectly possible to allow people to pay their tax “in kind” if they so prefer: instead of 2 per cent of the assessed cash value of their business holdings, they could always have the option of transferring to the tax collector a 2 per cent stake in those holdings instead.
Let us finish on how unacceptable the current situation is. Two basic principles of good taxation are that taxes, to be efficient, should aim to be broad, uniform and without exceptions, and that, to be fair, it should make those with the greatest ability to pay, shoulder the greatest burden.
Both principles entail that whatever you think the rest of the tax system should look like, the ultra-rich should pay at least as much if not more than others in tax, as a share both of their wealth and of the income their wealth can reasonably be expected to be generating. In addition, a tax assessed on wealth is likely to be better for productivity than other capital taxes, which is why I have called wealth taxes a handmaiden of capitalism.
The only (thin) arguments for permitting the current situation to persist are ones of highly constrained fiscal pragmatism: attempting to tax the richest more will make them flee, and it’s too hard to capture a taxable income of the ultra-rich. Zucman’s proposal deals with both. The G20 should waste no time in giving it serious consideration.
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