Few things disturb a billionaire more than a taxman in the neighbourhood.
For proof of that, look to Bernard Arnault, chief executive of luxury goods conglomerate LVMH. In a recent interview, he thundered that a proposal to force the superrich to pay a minimum of two per cent of their net worth each year would be “deadly” and destroy the French economy.
Um, right. Arnault, who is worth north of US$150 billion by most estimates, may be overstating his case just a tad. At the very least, he’s not reading the room.
Like it or not, governments and the ultra-wealthy are on a collision course. The question of how to tax the rich has moved over the past few years from leftie obsession to the centre stage of mainstream debate.
It’s a matter of necessity. Many developed nations now verge on fiscal crisis. The United States and France are the most obvious examples. Both are gushing red ink at rates that might be appropriate if they were at war. The problem is that they’re at peace.
The budgets of Britain and Italy are also deep in deficit. Even Germany and Canada—two of the more sober financial managers among advanced economies—are struggling to meet the rising costs involved with Donald Trump’s self-centred new world.
Governments have only two ways to restore fiscal sanity: they can slash services or they can increase tax revenue.
The former is unlikely at a time when aging populations are demanding more medical care and there is an urgent need to re-arm for a more dangerous world.
That leaves the other fiscal remedy: raising taxes.
The political economy of wealth taxes
This is the simple, obvious way to deal with a budget shortfall. Unfortunately, taxpayers don’t like the notion one bit. And they are in a vile mood.
Consider France, which is now on its fifth prime minister in less than two years. Or Britain, where the Labour party has plummeted in the polls barely a year after it won a landslide victory.
In both cases, popular support for the powers-that-be collapsed the moment they made any serious effort to deal with fiscal problems. Call it the new reality: Across the developed world, national leaders face electorates that want pensions and services to be maintained, but object to any increase in taxes to pay for them.
No wonder, then, that wealth taxes have re-entered the debate. They have two major selling points: First, they have the potential to raise significant revenue. Second, they transmit a powerful signal that everyone is now paying their share—a politically vital point to make for any government that would like to raise tax rates in general.
The devil is in the details. Past attempts to tap fat wallets foundered because they were difficult to administer and generally failed to generate the revenue their architects had forecast. A dozen countries in the Organisation for Economic Co-operation and Development had recurrent taxes on net wealth in 1990. Only four still levied them in 2017, according to a 2018 OECD report.
So, what makes people think they are practical now? In part, it’s about popular will.
The release of the Panama Papers in 2016 highlighted the massive, shadowy industry that had grown up around helping the wealthy sidestep the collection plate. Meanwhile, a growing body of economic research has cast light on just how little the superrich are paying in tax.
Can governments make the rich pay?
The world’s billionaires shell out only about 27 per cent of their incomes in all forms of taxes, about half the effective tax rate for the rest of the population, according to Gabriel Zucman, an economist at the Paris School of Economics and director of the European Union Tax Observatory. He calculates that billionaires’ annual tax bill amounts to only about 0.3 per cent of their total wealth.
When national budgets are stretched as they are now, this system seems unsustainable. There is an obvious case for the rich to pay more. The problem? Past attempts to ding the wealthy have always been stymied by the ability of the superrich to move to lower-taxed jurisdictions.
However, that may be changing. The Group of 20 major economies has made notable progress in recent years on co-ordinating national tax policies. In 2021, for instance, more than 130 jurisdictions agreed to a common minimum tax of 15 per cent on large multinational companies.
A similar approach might work with the ultrarich. The essential notion would be for major countries to agree to levy a minimum tax on accumulated wealth, but one that would be relatively modest and apply only to the very, very wealthy. Sure, a billionaire could still relocate to a low-tax region, but they would have to pay an exit tax to do so.
And what would happen to billionaires who stay? Zucman suggests a reasonable system might require them to pay a minimum of two per cent of their wealth every year. To achieve this minimum, they would start by listing what they already pay in income taxes and other levies. Then—if necessary—they would pay an additional wealth tax to bring them up to the two per cent minimum.
Just to be clear: A billionaire would face absolutely no additional levy under this system if she were already paying the annual equivalent of two per cent of her wealth in income, consumption, property and other taxes.
Also, to be clear: So long as the billionaire was generating an annual return of two per cent or more on her net worth, the minimum tax would not significantly affect her wealth. In most cases, her fortune would continue to grow, just a bit slower than before.
This is the not-so-outrageous proposal that has so inflamed Arnault. It has also sparked predictable howls of protest from tax lawyers and others who serve the ultrarich.
Let the debate rage. It’s entirely possible that there are better, more equitable, more ingenious ways to ding the very wealthy. But what the financial industry should realize is that the debate is not going to go away. So long as national budgets are under severe strain, the debate over wealth taxes will remain at centre stage.
Ian McGugan writes about markets and economics. His work has appeared in the Globe and Mail, the New York Times and Bloomberg/BusinessWeek. He was founding editor ofMoneySense magazine.
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