20/08/24

WEALTH TAX: Countries can raise $2 trillion by copying Spain’s wealth tax, study finds

As published on: taxjustice.net, Tuesday 20 August, 2024. 

Ending special tax treatment afforded to superrich can cover estimated climate finance needs

• Following the example of Spain’s “featherlight” wealth tax on the 0.5% richest households would see countries raise $2.1 trillion a year globally
• Evidence shows tax reforms targeting extreme wealth have not resulted in the superrich relocating to other countries
• On average, just 3% of each country’s wealth is owned by half its population, while its richest 0.5% own a quarter
• Extreme wealth is making economies insecure and is directly linked to people having to spend more than they bring in
• Two-tie treatment of wealth (lower taxes on collected wealth, ie dividends, rent, capital gains; higher taxes on earned wealth, ie salaries) is fuelling extreme wealth and making economies poorer than the sum of their parts

Countries can raise $2.1 trillin a year by following the example of Spain’s successful wealth tax on the 0.5% richest households¹ – that’s double the amount needed annually for developing countries’ external climate finance, expected to be at the centre of COP29 negotiations this year.²

The new study from the Tax Justice Network published today, and airing on BBC World TV this morning, estimates how much revenue each country can individually raise by taxing the wealth of only the richest 0.5% of its households at a feather-light rate of 1.7% to 3.5%. The wealth tax would only apply to the upper crust of the households’ wealth rather than all their wealth.³

While the study replicates the approach of the Spanish wealth tax for each country, the study extends the tax to all classes of wealth in its modelling. This removes some exemptions within the Spanish law which weaken its impact.⁴ The study finds that on average each country could raise the equivalent of 7% of its spending budget.

The study documents that previous tax reforms targeting the superrich did not result in the superrich relocating to other countries, despite media headlines claiming the contrary. Just 0.01% of the richest households relocated after wealth tax reforms targeting the richest households were implemented in Norway, Sweden and Denmark. A UK study predicts that non-dom status reforms would see a migration rate of between just 0.02% and a maximum of 3.2%.

The study’s estimates on how much tax countries can raise with wealth taxes conservatively assumes that such a migration rate of 3.2% would occur.⁵

Two-tier treatment of wealth is making economies insecure

The huge sums to be raised from the modest wealth tax are possible due to the extreme levels of wealth collected by the very richest. The study finds that on average, in each country, just 3% of all wealth is owned by half the population, while the richest 0.5% own a quarter (25.7%) of the wealth.

This extreme wealth among the superrich, the report documents, is making economies insecure and is directly linked to lower economic productivity⁶; to non-rich households having to spend more than they bring in⁷; and to poorer societal outcomes such as worse educational attainment⁸ and shorter lifespans⁹.

The root of the problem is the two-tier treatment of collected wealth and earned wealth, the Tax Justice Network argues. Collected wealth – ie dividends, capital gains and rent gained from owning things – is typically taxed at far lower rates than earned wealth – ie salaries gained by working. At the same time, collected wealth typically grows faster than earned wealth. Today, only half of the wealth created around the world each year goes to people who earn for a living – the rest is collected as rent, interest, dividends and capital gains.¹⁰

While the superrich might work and have jobs, virtually all their wealth comes from owning business and real estate empires, not from working in those empires. Any work salaries they might earn are a drop in their wealth bucket. Three out of the five richest men on Forbes’ Billionaire List 2024 earn $1 salaries: Elon Musk, Mark Zuckerberg and Larry Elison.¹¹ According to a 2011 study, the average “$1 CEO” gives up $610k in salary but gains $2m in other ownership-based compensation.¹²

The two-tier treatment has produced extreme results when it comes to the very richest individuals. Billionaires tend to pay tax rates that are just half the rates paid by the rest of society.¹³ And their wealth grows at twice the rate as that of the rest of society.¹⁴ This has contributed to the wealth of the 0.0001% quadrupling since 1987, to the detriment of economies, societies and planet.¹⁵

Crucially, the extreme accumulation of wealth doesn’t just create extreme imbalances that have harmful consequences, it renders that accumulated wealth less economically productive – for example by diverting disproportionally more wealth towards speculative derivatives instead of goods and services in the “real” economy.¹⁶ The Tax Justice Network’s spokesperson attributes this to “why the world might not feel any richer today despite there being more wealth than ever before.”

The two-tier treatment of how people gain wealth amplifies this trend. By enabling collected wealth to dramatically outpace earned wealth, the two-tier treatment nudges wealth towards forms that are less productive and are out of the reach of wealth earners, while increasing indebtedness among non-rich households.

The Tax Justice Network is calling on governments to put an end to the two-tier treatment of wealth by introducing wealth taxes. The report provides countries with detailed guidance on how to implement wealth tax laws modelled in the study and based on Spain’s example.

Mark Bou Mansour, head of communications at the Tax Justice Network, said:

“Our economies were designed to let people earn the wealth they need to lead secure and comfortable lives, but our tax rules make it easier for the superrich to collect wealth than for the rest of us to earn it. This has let the superrich collect extreme wealth to the point of making our economies insecure and making it scarcely pay to earn a living.

“There’s this idea that billionaires earn wealth like everybody else, they’re just better at it. This is bogus. It’s impossible to earn a billion dollars. The average US worker would have to work for a stretch of time 13 times longer than humans have existed to earn as much as wealth as the world’s richest man has today. Salaries don’t make billionaires, dividends and rent money do. But we tax dividends and rent money much less than we tax salaries, and this is destabilising the earner model our economies are based on.¹⁷

“By definition, a billionaire owns more wealth than an average US household could spend in 10,000 years. Wealth contributes a lot less to the economy than it can when it’s pharaoh-tombed like this, making economies poorer than the sum of their parts.¹⁸

“To make our economies secure and protect the earner way of life that has defined the modern era, we need wealth taxes that end the two-tier treatment of wealth.”

Governments must act on huge public demand for wealth taxes

Recent polling shows overwhelming public support for wealth taxes on the superrich in several countries. A 68% majority of adults across 17 G20 countries are in favour of wealthy people paying a higher tax on their wealth as a means of funding major changes to the economy and lifestyles.¹⁸ Nearly three quarters of millionaires polled in G20 countries support higher taxes on wealth and over half of them think extreme wealth is a “threat to democracy”.¹⁹

The G20’s recent proposal for a 2% minimum wealth tax on billionaires has been positively received by policymakers and campaigners alike.²⁰ Designed to replicate the planned global minimum corporate tax rate, the G20’s proposal will require most countries to come on board or an international agreement to be put in place. Meanwhile, countries can domestically proceed and follow the example of Spain’s wealth tax law today.

While the G20 wealth tax proposal’s targeting of billionaires will primarily address the most extreme wealth concentrations in rich countries, following suit on Spain’s wealth tax law which more widely targets the 0.5% will allow all countries to tackle extreme wealth concentration in their economies. (A comparison of the two complementary proposals is shared in note 22 below.)

The success of any wealth tax proposal ultimately depends on countries cooperating on tax transparency. While warnings of the superrich reallocating in response to wealth taxes have proven to be unfounded, the superrich’s ability to use secrecy jurisdictions and financial secrecy to hide their wealth from tax administrations can keep wealth taxes from being fully effective. To make wealth taxes truly effective, countries must make sure the UN tax convention²² currently being negotiated delivers robust tax transparency standards, the Tax Justice Network explains.

Alison Schultz, research fellow at the Tax Justice Network and one of the report’s authors, said:

“The vast majority of countries are currently working on what can be the biggest shakeup in history to global tax rules, to end the scourge of global tax abuse by multinational corporations and the superrich. But a minority of rich countries still seem to be holding back from support for a robust framework convention on tax – despite this being the best opportunity that we’ve ever had, and one that their own people demand they act on with urgency. Some of the same countries are blocking real progress on climate COP29 – stopping the world from clawing back trillions in tax from tax havens in one meeting, and then claiming in the other meeting that there’s no money for the climate crisis. This needs to change now – the climate can’t wait, and nor can the people of the world.”

Tags

Wealth tax Spain Global tax Billionaire tax Public spending