A minimum tax on billionaires

 

Most people would agree that taxes, taken as a whole, should be progressive. When you add up all the taxes that an individual pays, the percentage that tax is of their income should be positively related to how their income is relative to others. The poor should pay a lower percentage of their income in tax than the rich. The political argument is generally about how progressive taxes as a whole should be.

In most economies taxes are roughly progressive until we reach very high incomes. The chart below comes from a recent lecture by Gabriel Zucman.

In all four countries taxes are mildly progressive (although the progression is far from smooth) until we get to the very rich. Billionaires, in particular, seem to pay significantly less in tax as a percentage of their income than most other people.

This is hardly fair, but it is perhaps not that surprising. Specifically much of the income of the very wealthy comes from capital gains on the assets they hold, and generally these will only be taxed when those assets are sold. More generally those with a lot of money can afford to pay people to help them avoid tax, and those with a great deal of money have the power to influence whether politicians or those that collect tax try to stop that avoidance.

One way to try and rectify this unfairness, and also to raise a not insignificant amount of revenue, is to try and change specific tax laws to prevent avoidance or tax capital gains. While eminently sensible, this approach suffers from two political problems. First, such proposals are often highly technical, and so rarely attract widespread popular support. Second, the very rich are also very skilled at finding individual cases or circumstances where such changes in tax codes seem unfair.

Proposals for wealth taxes, for example, are often countered by invoking the widow who lives in a large expensive house but has relatively little income. There are ways around such problems, like deferring tax, but as those that own the media also tend to be very rich those work arounds can easily get lost in public debate. Another example became apparent in the UK recently, after the government changed the law to allow farmers to pay some inheritance tax. It was quickly claimed that doing this would prevent farmers passing on their farm to their children, demonstrations were organised and newspapers campaigned, featuring wealthy celebrities some of whom had bought farms just to avoid inheritance tax.

An alternative approach is to only look at the total taxes paid by the extremely wealthy, and set some minimum level of their wealth that these individuals should pay each year. If they already pay that minimum then fine, but if they pay less than that minimum they will be required to pay an additional tax to reach that minimum. This is the idea pioneered by Gabriel Zucman, an economist at the Paris School of Economics and former pupil of Thomas Piketty. [1] Specifically he suggests billionaires, or those with wealth above 100 million, should pay total taxes each year worth a minimum of 2% of their wealth.

The great advantage of this approach is that it is harder to obstruct politically. As the tax applies only to the extremely wealthy, it is much more difficult to evoke public sympathy for any of the individuals involved. As the wealth of the very rich can easily increase by more than 5% a year, paying just 2% in tax will hardly cause hardship.

The breakthrough for this proposal came at the G20 summit last year, when hosts Brazil asked Zucman to present his proposal, and managed to get countries to agree: “With full respect to tax sovereignty, we will seek to engage cooperatively to ensure that ultra-high-net-worth individuals are effectively taxed.” The “Zucman tax” was adopted by the French parliament (the far right abstained), but was rejected by the Senate.

A standard objection to taxing the very wealthy is mobility. If you try to tax billionaires more they will move to a country that taxes them less, and you will lose all their tax. Again we saw an example of this in the UK last year, with a report claiming a wealth exodus from the UK caused by proposed tax changes. However the reality is rather different to the rhetoric. In his detailed proposal for the G20 Zucman notes that recent studies suggest that such billionaire flight is modest, and that the number of billionaires who live in a country different from their country of citizenship is still below 10%. Last year’s UK study, although it got widespread publicity at the time, was always of dubious status and has since been debunked. [2] To reduce even this modest possibility of billionaire flight, countries could charge an exit tax, or could continue to tax individuals wherever their companies do business.

Because Zucman’s proposal sets a minimum tax of 2% of wealth, it is not in competition with other proposals to change the tax system designed to make it less regressive at the very top. In some ways it could be seen as a means of making other measures easier to implement. For example, if billionaires are paying a minimum tax anyway, proposals to reduce forms of avoidance on other taxes will receive less opposition from the very wealthy because any additional tax they will pay will just mean they pay less to reach the 2% threshold.

Zucman’s proposal is incredibly modest. It would just stop the richest in society paying less tax as a proportion of their income than everyone else. It is highly unlikely to stop the wealth of the richest from increasing. Many would like to go further, but the great advantage of his proposal is that it will be seen as fair by virtually everyone. We know that monied interests have the power to persuade governments that taxing them fairly will lead to all kinds of imagined horrors, or to persuade politicians that taxing them would not be in their personal interests. The French government opposed the Zucman tax. The only realistic chance we have of taxing the very rich fairly is to oppose such lobbying with mass support. Only democratic pressure can fight a plutocracy.

[1] Something similar was suggested by Warren Buffet more than ten years ago, when he noted that his secretary worked just as hard as he did, but paid twice as much of her income in taxes. His proposal was adopted by President Obama, but was rejected by Congress.

[2] Arun Advani and colleagues look at the impact of past changes in the taxation of non-doms here.