The extreme wealth of the super-rich makes our economies more insecure and poorer than the sum of their parts.
Our economies are designed to give people the wealth they need to live secure and comfortable lives, but our tax laws make it easier for the super-rich to accumulate wealth than for the rest of us. As a result, the super-rich have accumulated extreme wealth that has made our economies less productive, more households in debt, and people have shorter life expectancies.
Wealth taxes are the best tool to end the two-tier taxation system that puts people who make their living from wealth (those who live primarily on high dividends and rental income) above those who make their living from wealth (those who live primarily on their labor income). We need wealth taxes to safeguard our economies and protect the working lifestyles that have defined the modern era.
Countries could follow the example of Spain’s successful and modest wealth tax, collecting $2 trillion in taxes from the world’s richest 0.5 percent today.
Here’s our step-by-step guide to taxing the super-rich.
Procedure
1. Set the bar for wealth high and only tax wealth that exceeds that bar.
Setting a high threshold—say, the top 0.5% of wealth—means that any wealth a person owns below that threshold will not be taxed. This ensures that the wealth tax applies only to the super-rich and does not negatively impact the middle and lower classes. It also means that the very wealthy individuals to whom the tax applies only have to pay taxes on the top layer of their wealth—that is, the portion of their wealth above the 0.5% threshold. In Switzerland, for example, the 0.5% threshold is $11 million. So a wealthy Swiss person would only be taxed on wealth above $11 million. His first 11 million would not be taxed. A high threshold makes wealth tax easier for governments to administer and more politically feasible.
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2. Apply the tax to all types of assets to protect the super-rich from tax fraud
Exempting certain types of assets from tax opens up opportunities for the super-rich to abuse it. They can shift their wealth into exempt categories to pay less tax. Not only is this shift economically bad – as wealth flows to where the tax burden is lowest rather than where it is most productive – it also makes implementation more difficult and the job much more costly for tax authorities. By imposing wealth tax on all asset classes above the high threshold, the government can prevent inefficient investment and limit the scope for tax abuse. If you are a government and are worried about the potential impact of applying the tax to corporate assets, don’t worry. We’ll explain how to deal with it in step 6 below.
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3. Ensure full transparency among company and asset owners to tax the right amount
When governments collect income taxes, they don’t rely solely on citizens’ reports. They use official records to verify how much a person has earned and should be taxed. Otherwise, people may under-declare taxes and underpay. Wealth taxes are no different. The problem, however, is that the owners of businesses and assets can obscure the paper trail that ties them to their ownership. The best tool for uncovering these paper trails is public registers of beneficial (i.e. true) ownership. These registers provide detailed information about who actually owns and controls businesses and assets, and equip governments with the official records they need to verify how much wealth a person has and how much tax they should pay.
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4. Strengthen transparency standards at the United Nations so that the super-rich cannot hide their wealth in tax havens
The strength of countries’ tax laws ultimately depends on our global tax transparency standards. The ability of the super-rich to use secrecy jurisdictions – a type of tax haven that specializes in hiding their finances from the laws of other countries – to hide their wealth from tax authorities can make wealth taxes lose their full impact. For wealth taxes to be truly effective, countries must ensure that the UN tax convention currently being negotiated provides for robust tax transparency standards.
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5. Take security measures to ensure that super-rich people who emigrate to other countries continue to pay their debts
There is evidence that imposing a wealth tax on the super-rich does not cause them to leave the country in droves, despite media headlines claiming otherwise. Only 0.01% of the richest households moved after wealth tax reforms targeted at them were implemented in Norway, Sweden and Denmark. To be on the safe side, however, governments can take measures to ensure that a long-time resident super-rich pays the wealth tax due even if they move abroad. For example, governments can impose a tax obligation on former residents for a certain period after they move abroad, or impose exit taxes on people who give up their residence. It is worth noting that if other countries also introduced wealth taxes, there would be little point in moving elsewhere.
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6. Offer entrepreneurs some flexibility so they don’t have to liquidate their business to pay their taxes
Concerns that business owners may have to sell parts of their companies to pay their wealth taxes can be addressed by providing alternative payment options. For example, business owners who cannot pay their tax debts in cash by year-end and cannot easily generate liquidity from their companies—unlike publicly traded companies that can sell stocks—could transfer a portion of their company stock equal to the tax liability to a government-managed “wealth tax trust.” This approach has been used successfully in taxing inherited artwork. The government would own that portion of the company and have the right to receive its share of the profits, but no control over the running of the company. And the business owner would have the option to buy back those shares at the same price within a specified period of time. If the owner chooses not to buy them back, the trust would sell the shares on the market after a set period of time. This approach protects companies from the burden of wealth taxes while ensuring that their owners pay the taxes owed.
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7. Debunk all the myths used to scare the public away from wealth taxes
There are many common misconceptions about wealth taxes: they drive out the super-rich, they hit the middle class unfairly, they harm the economy. None of this is true: the super-rich stay where they are, wealth taxes apply only to the very rich, they increase economic productivity and investment. What is rarely talked about is the two-tier taxation of wealth. Accumulated wealth – that is, dividends, capital gains and rental income from owning property – is usually taxed at far lower rates than earned wealth – that is, salary earned through work. At the same time, accumulated wealth usually grows faster than earned wealth. This has led to the wealth of the super-rich – whose wealth is virtually all accumulated, not earned – quadrupling since the 1980s. Wealth taxes end this two-tier treatment, make our economies safer and protect the working lifestyles on which our economies are based. Governments should debunk myths about wealth taxes and provide clear and factual information about how they would implement wealth tax reforms, who they would affect and what benefits they would achieve.
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