TIOL - COB( WEB) - 919
MAY 09, 2024

By Shailendra Kumar, Founder Editor

EVEN as inheritance tax (popularly known as 'Death Tax') continues to kick in political kerfuffle in poll-bound India, wealth tax has sprung up to dominate informed discourse on the global canvas. Brazil, the current president of G20, has floated a tax proposal to hem in the super-rich globally. Brazil intends to construct international consensus on the taxation of wealth, and would cajole all like-minded countries for a joint declaration at a meeting of G20 Finance Ministers and Federal Bankers in July. The Brazilian proposal has received open backing of France and the IMF. Germany is the only country, thus far, which has openly expressed its reservations. Japan and Italy also tend to share the German concerns. For many others, it is, thus far, a case of head-in-the-sand! Guess, India may be pivoting away from a position of ambivalence to back the Brazilian proposal. China's case is sui generis as the single-party regime is scared of pushback or demand for accountability if more fiscal burden is piled up. China is sorely called half-tax state as it collects barely 8% of its revenue from income tax as compared to 37% in the West.

At the recently held spring summit of IMF and World Bank, the Brazilian Finance Minister said that he is eyeing political backing of his initiatives by the G20. The French Minister believes that taxing the rich is the logical next step for a series of global tax reforms initiated in 2017. Any time-frame? The acolytes of this proposal are targeting 2027 as the year of implementation! In her address, the IMF Chief underlined that plugging tax loopholes and ensuring that the super-rich pay their fair share, would garner funds, much-needed for inclusive growth. She said that curbing tax avoidance by large corporations could mobilise an additional USD 200 bn a year in revenue, in addition to USD 150 bn by implementing Global Corporate Minimum Tax. Oxfam is of the view that though it is a positive step in the right direction but 2% tax is too dismally modest! It projects that an annual wealth tax of 8% would be needed to keep billionaires' wealth constant over the last two decades. The EU Tax Observatory has found that billionaires worldwide suffer an effective tax incidence of barely between 0% to 0.5% of their wealth! A study done by a noted economist Gabriel Zucman finds that about 3000 taxpayers who have assets worth USD above one billion, pay about 2% of their wealth in income tax annually. This generates about USD 250 bn a year - half of it is projected to be needed by the Global South countries to combat climate change challenges. Tax Justice Network, an advocacy group, states that the world is going to lose close to USD five trillion in tax revenue over the next decade due to the presence of interminable tax havens! Interestingly, it is widely surmised that wealth concealed offshore is more than twice the printed dollars and euros in circulation today!

Anyway, the UN Tax Committee has also arrived at a consensus for designing 'example' wealth tax laws which would enable all countries to tax excessive accumulation of wealth. The UN guidance note will cater a blueprint with the technical knowhow and also the political backing to tax the super-rich who have, thus far, escaped owing to intense lobbying pressure. The UN consensus indeed marks a historic shift in global consensus on subjecting wealth to additional levy and also UN's ability to shepherd global tax reforms at inclusive scale! Traditionally, UN Tax Committee used to receive pushback from OECD on any proposal to tax, either the super-rich or large corporations. But this time, OECD has quietened itself as a parallel proposal has been moved at the G20 forum. What must have also weighed down on the OECD is the unmitigated stand of the Biden Administration to tax the super-rich. In his budget, Mr Biden had proposed higher taxes on taxpayers earning more than USD 4 lakh annually and the same would have garnered about USD 361 bn in revenue over 10 years from 0.01% households. Even Mr Trump had, in 1999, proposed 2% wealth tax on Americans with more than USD 10 mn. Other US Senators had called for 3% tax rate on wealth above USD one billion. All the backers of such a levy aim to achieve three-fold goals - to raise revenue, to minimise inequality and limit the accumulation of vast wealth so that they do not influence the polity. Aha! They seem to believe that such a tax would bring down American capitalism on its knees and also clip the wings of political lobbyists!

What seems to have prompted Brazil to wade into these controversial fiscal waters are the bumper fortunes the planet's billionaires have been piling up since the pandemic days. When the world was locked at home, online Maharaja, Amazon, made billions of profits. Similarly, several tech giants like Microsoft, Apple, Meta and Zoom raked in oodles of profits in billions. Even today, irrespective of sticky inflation, political turmoil and regional wars, their stocks continue to shrug off all types of catastrophes. As per Forbes, there are 2781 billionaires in 2024 - 141 more than last year. They are worth over USD 14 trillion - up by USD 2 trillion from 2023. Close to 70% have gained in the past one year - top 20 have cornered USD 700 bn in wealth. A surgical and forensic glance at the tally reveals as many as 813 billionaires worth USD 5.7 trillion from the US. China plus Hong Kong comes poor second with 473 worth USD 1.7 trillion. India also arrogates to itself with 200 billionaires. UK and Germany come 4th and 5th with 146 and 140 respectively. Switzerland is the last with billionaires in three-digit. The Harun Global Rich list is almost similar with the same set of billionaires - the only difference lies in their rankings because of a change in the methodology. I am sure that Brazil which has only 60 billionaires, is not eyeing only less than 3000 super-rich for the new levy. The G20 would have to come up with much lower threshold like USD 100 mn or more, in order to mop up substantive revenue to fund climate change and other global crises. Since the Brazilian proposal is thin on detail, it is quite early to speculate about the quantum.

Going by historical experiences, my fear is that the Brazilian proposal may turn out to be a case of 'brain death'! A wealth tax is an old and jejune hack to shore up tax revenue but it has not worked in the past. In 1990s, as many as 12 rich economies had imposed such a tax. By 2017, the number dwindled to four - France, Spain, Switzerland and Norway. In fact, France also had a de jour top tax rate of 75% which was guillotined in 2014 as it raised less revenue than expected and also dissuaded foreign investors. Interestingly, the French economist Thomas Piketty had proposed a tax on wealth in 2014, to counter ill-effect of capitalism's innate propensity toward growing inequality a la his book "Capital in the 21st Century". Sweden is indeed a very special case - opted for wealth taxation in 1911 but based on vinegary experience, abolished it in 2007 and also inheritance tax in 2005. Sweden is today one of the most unequal countries where billionaires' wealth account for one-fourth of the GDP, yet these plutocrats are very popular among the commoners! Anyway, most countries which scrapped this tax, had experienced much lower tax collections than projected or did not find it worth the administrative-aches! Major hassles the taxmen faced were - valuation, tax avoidance and, of course, economic impact. Assigning a value to items like paintings, art, antiques and other illiquid assets was a controversial challenge. Secondly, exemption of certain items resulted in rampant tax avoidance, and thirdly, many studies indicated that such a tax tends to kill the spirit for innovation and investments!

So, what has changed in the last two decades? Why some of the G20 countries want to push for reincarnation of wealth tax again? Is it indeed a sure fire solution to make a dent into growing global income inequality? Has it proven to be an effective inequality-buster? Or, the Brazilian proposal is merely an agitprop by a leftist President? Should one really put the blame on globalisation for rising inequality? Or, going by the 'Limitarianism' principles, States should cap wealth accumulation to a limit like USD 50 mn? These are all tricky questions with no straightforward answers. However, two facts which may be attributed to the process of globalisation are - one, it has brought down global poverty from around two billion in 1990 to less than 659 mn prior to the pandemic as per the World Bank studies. Secondly, globalisation has favoured the rich by rewarding capital more substantially than labour. It has also facilitated the plutocrats to hide their wealth in tax havens. Since the G20 and its trusted agency, OECD, have failed to make a dent into the rising mounds of wealth of billionaires (wealth managers are today handling wealth worth over USD 100 trillion) and their future wealth which would come from investments into technology shares booming in the market, Brazilian proposal is certainly not ill-timed. Whatever extra revenue is going to be garnered, that would help combat some of lingering almost-permacrisis like climate change, green transition, public debt and global poverty. Most countries are today starved of resources and they do need to look after the vulnerable chunks of population besides a thicket of other challenges, including infrastructure and development. I am sure that some fiscal economists may dub the Brazilian proposal as obscurantist idea, based on science of disinformation but it is also true that there is no proven tax-prophet in this world and economists often dead-end on such issues! Whew, it may also be a case of fiscal Cassandra! Voila!