The Wealth Tax Isn’t Dead. It’s Going Global
The fortunes of the world’s richest people soared in 2020 even as the pandemic caused economic devastation, a stark trend that is reviving calls to tax all that new wealth.
From Chile to the U.K., left-leaning parties, lawmakers, activists and academics are floating new proposals for levies on millionaires and billionaires, with the goal of directly taxing their assets rather than hiking rates on sources such as income.
Argentina approved a one-time wealth tax last month, and Bolivia’s legislature, fulfilling a campaign promise by its new socialist president, passed an annual levy on large fortunes at the end of the year. Lawmakers elsewhere in Latin America — such as Chile and Peru — have recently pushed for similar measures.
And in the U.S., even though President-elect Joe Biden isn’t a fan of a wealth tax, progressives are pushing forward on the state level. They’re starting in two Democrat-controlled states, California and Washington, where at least six of the world’s 10 richest people reside.
“All around the world you see increasing awareness of growing wealth and income inequalities, combined with growing awareness that our tax system is not up to dealing with this problem,” said Indiana University law professor David Gamage, who has helped develop wealth tax proposals.
Wealth taxes are being discussed again despite a checkered history. Most past experiments with the concept, including in Germany and France, were later abandoned. Critics have cited the costs and complexities of putting a value on fortunes, while arguing the measures create incentives for rich residents to move away or game the system with tax-avoidance strategies.
Progressives argue Europe’s previous efforts had design flaws that can be repaired. The levies can be made easier to administer, for example, by targeting a smaller group of extremely wealthy people and by relying on advances in financial transparency and technology to assess wealth. One-off taxes, like the one in Argentina, are also harder to avoid than annual ones.
Driving the idea’s revival is the need for revenue. The pandemic has devastated government finances around the world, boosting spending by trillions of dollars, from India to Canada, while slashing tax collections.
The situation in the U.K. — which now faces its widest fiscal deficit since World War II — has brought the idea of taxing wealth back into the discussion. An independent commission last month called for a one-off levy to raise about 260 billion pounds ($354 billion) — more than a third of the U.K.’s tax receipts in the latest financial year. Raising that much money would require taxing individual wealth above 500,000 pounds at 1% annually for five years, affecting 8 million people.
“There’s been quite a lot of murmurings about reforming existing taxes on wealth, but everyone’s just effectively treated a wealth tax as being off the ‘serious’ agenda,” said London School of Economics assistant law professor Andy Summers, one of the report’s authors. “Partly, that’s because barely anyone in the U.K. has studied it since the 1970s.”
In Europe, a wealth tax would likely hit hardest in Germany, the nation on the continent with the highest number of billionaires on Bloomberg’s index of the world’s 500 biggest fortunes.
Germany’s Social Democrats endorsed a wealth tax in 2019, and the left-wing Die Linke party commissioned a study published in October on its plan for a one-time levy on wealth payable over 20 years, though Chancellor Angela Merkel has previously rebutted such measures.
In the U.S., presidential candidates Elizabeth Warren and Bernie Sanders excited progressive voters — and scared more than a few billionaires — with plans to tax the wealth of the rich. Polls showed the idea was popular, but Biden’s win means a wealth tax is likely dead for now, even assuming Democrats take control of the Senate when the results are finalized in the Georgia runoffs.
Instead, proposals are appearing in state capitals. In Sacramento, state Assemblyman Rob Bonta, a Democrat from Alameda in the East Bay, proposed imposing a new yearly tax of 0.4% on net worth over $30 million for joint filers. The bill died in 2020, but Bonta said he is considering reviving it and other measures.
“We’re only asking those who are doing well to help those who are suffering,” he told Bloomberg Law in November.
There’s no income tax in Washington state, home to some of the world’s richest people: Amazon.com founder Jeff Bezos; his ex-wife, MacKenzie Scott; and Microsoft founder Bill Gates and former CEO Steve Ballmer. That’s led to a system that is the most regressive in the U.S., according to the left-leaning Institute on Taxation and Economic Policy: The poorest fifth of residents pay state and local taxes that add up to almost 18% of their incomes while the top 1% pay an effective rate of 3%.
Progressive lawmakers there plan to introduce a wealth-tax bill in the Democrat-controlled legislature as early as this month, according to John Burbank, executive director of the Seattle-based think tank Economic Opportunity Institute. The goal is “taxing the wealthiest Washingtonians, those who have benefited most from the pandemic” to help deal with the fiscal crisis caused by Covid-19, he said.
The fortunes of the world’s 500 wealthiest people rose almost a third in 2020, according to the Bloomberg Billionaires Index, surging by $1.8 trillion to $7.6 trillion.
Other types of taxes are also being floated. Washington State Gov. Jay Inslee proposed a new capital-gains tax last month. In New York, where a wealth tax would face arguments that it violates the state constitution, Democratic legislators have proposed a levy on billionaires’ unrealized capital gains and a pied-a-terre tax. New Jersey approved an income-tax hike on millionaires in September.
The initiatives in the U.S. are having an influence abroad, according to Summers, co-author of the U.K. proposal.
“The U.S. does help to shape global opinion when it comes to high finance,” he said. “If something is in the window of possibility in the U.S., it’s something other countries take seriously.”
Still, critics point out that previous efforts to directly tax fortunes have often ended in failure. In 1995, 15 nations in the Organization for Economic Cooperation and Development taxed wealth. By 2019, only four still had kept them: Switzerland, Belgium, Norway and Spain.
Higher taxes on the wealthy also threaten to push away rich residents. Elon Musk and Larry Ellison recently said they had moved away from California, the U.S. state with the highest income taxes. In Argentina, where its one-time levy will target between 1% and 3% of a rich individual’s wealth, more than 500 Argentines took tax residency abroad last year.
“It’s important to think about being attractive and not put off those who create wealth for the wider population,” said Richard Jameson, partner at London-based accounting firm Saffery Champness, on the proposal for a U.K. wealth tax.
Advocates of wealth taxes cite research showing the rich are actually less likely to move than other people, often because of strong business and social ties that were an essential part of their success. And if a few billionaires do leave to escape taxes? That’s OK, said Gamage, the Indiana University law professor.
“I would be fine with a few mega-millionaires and billionaires leaving in order to collect tax revenue from the rest,” he said.
— With assistance by Laura Mahoney, and Emily Cadman
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