In the US, the Democratic Party wants to introduce a wealth tax for the richest Americans to redistribute their economic power. Here’s an explainer on how wealth tax is imposed around the world
Covid-19 pandemic has been difficult for people around the world. According to the World Bank estimates, between 88 million and 114 million people have fallen into extreme poverty since the start of the pandemic. Studies have found currently there are more than 700 million people living in extreme poverty and this number is expected to rise in the coming months.
On the contrary, wealth held by billionaires around the world has risen to $10.2 trillion in July, despite the Covid crisis. The number of billionaires also rose from 2,158 to 2,189 in three years. The data collated by Swiss bank UBS and consulting firm PwC says healthcare billionaires saw their wealth rise by 50 per cent, while technology giants have seen a rise of 42.5 per cent.
Amazon chief executive Jeff Bezos himself has seen his wealth rise more than 60 per cent during the pandemic to $195 billion, according to the Institute for Policy Studies and Americans for Tax Fairness. Tesla chief executive Elon Musk’s wealth was more than tripled to $85 billion. During the first four months of the Covid induced lockdown, the combined net worth of Indian billionaires too increased by 35 per cent to $423 billion.
People with fortunes of more than $30 million are classified as ultra-wealthy individuals. Researchers say there are more than 500,000 ultra-wealthy people around the world. This super-rich population is expected to swell by a further 27 per cent to 650,000 by 2024, according to economists.
For years, there have been calls to curb the economic power of the wealthiest people around the world. A recent New York Times investigation showed that US President Donald Trump who is a billionaire paid only $750 in federal income taxes in 2016 and 2017. The report which came to light a time when poor workers are being forced to shell out more as taxes has strengthened the cry to ‘tax the rich.’
What is the wealth tax?
Wealth tax is similar to property tax. While the property tax covers only the real estate, the wealth tax looks at wealth in all forms and is imposed on the value of an individual’s net worth. India had a wealth tax until 2015. But it was abolished when the central government found that the cost for recovering wealth tax was more than the tax collected.
Recently, as part of the election campaign in the United States, Democratic Party senator Elizabeth Warren proposed a wealth tax to redistribute the wealth of the richest Americans.
Twelve European countries had a wealth tax system in the early 90s. But today, there are only four countries in Europe that levy the billionaires. Like India, several countries discontinued it because of the struggle in collecting tax.
Sweden, for example, used to have an annual levy on taxpayers’ net assets. This was abolished in 2007. France also had a wealth tax, but it was scrapped by President Emmanuel Macron in 2017.
The following are the four countries that still have a wealth tax.
Despite its tradition of banking secrecy, Switzerland successfully collects wealth tax from its citizens since 1840. It is self-reported as the government does not do any institutional tracking of wealth. The tax collected by Switzerland is also the largest among its European peers. According to OECD data, the Swiss wealth taxes made up 3.6% of all tax revenue in 2017.
Norway is also a pioneer in introducing wealth tax. Started in 1892, the amount of revenue generated through wealth tax constituted approximately 1.1% of all Norwegian tax revenue.
Spain introduced a wealth tax in 1977. However, this was abolished in 2008 when the country’s economy collapsed as part of the global financial crisis. The Spanish government brought back the tax in 2011. Yet, the total revenue from tax constitutes only 0.55% of all tax revenues in Spain.
Belgium introduced a wealth tax on its rich citizens in 2018. Despite being a highly-taxed country, Belgium brought in the new levy on financial assets above €500,000.
Are wealth taxes the answer?
The arguments against wealth taxes point out that they are difficult to administer and enforce. It is also near impossible to establish reliable estimates of the net worth of wealthy individuals. Then there is the possibility of it encouraging the wealthy to take their assets out of the country. With more and more countries discontinuing the practice, a section of economists say there needs to be a new tax system to redistribute the wealth from the high net worth individuals.
However French economist Thomas Piketty, in a recent interview noted that introducing wealth taxes would help governments tide over the economic perils of the pandemic. According to him, while the world has very little experience in dealing with a pandemic of this scale, history has multiple examples of governments that successfully reduced public debt and one among them was the massive super-rich taxes imposed by Germany and Japan after World War II.
Watch the interview with Nobel winning economist Joseph E. Stiglitz and Thomas Piketty.
Meanwhile, some of the super-rich seem to be extending a proactive gesture towards taxes, even though critics say their activities only reflect a public relation stunt. In July, when the Covid-19 crisis was peaking across the globe, 83 millionaires together called on their governments to increase taxes on them to help pay for economic recovery from the Covid crisis.
The millionaires, including Ben and Jerry’s ice cream co-founder Jerry Greenfield and Disney heir Abigail Disney, put forward the idea to leaders around the world. Greenfield was part of a list of 400 millionaires who in November 2017 had asked the US government not to cut their taxes.
For further reading, here’s a list of articles and studies compiled by Jstor Daily on the origin and evolution of the wealth tax and its impacts.