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 recentlecture 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.
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