Good morning from New Economy Brief.
Wealth inequality is surging. Over the past decade, while living standards stagnated or even fell across much of the globe, the collective wealth of the world’s 2,781 billionaires rose by 120%. At the same time, governments are struggling to fund public services and measures to reduce the cost of living. One possible solution to these twin issues is gaining global popularity: wealth taxes.
Last month, G20 finance ministers explored a proposal for a “coordinated minimum effective taxation standard” on the ultra-rich. This would no doubt be welcomed by the public, with a recent Ipsos poll conducted in G20 countries showing that 70% support the principle that wealthy people should pay higher income tax rates. But would such a standard change anything? This week, we look at the issue of taxing global wealth and what might happen next.
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Why a global agreement?
Opponents of wealth taxes often object that the wealthy will simply leave the country if you tax them more. While there is evidence that wealth taxation does not cause large-scale ‘capital flight’, some suggest that international coordination will overcome any risk of race-to-the-bottom taxation policy and the use of tax havens. However, domestic fiscal policy cannot be determined by an international body, so the proposal being discussed is simply a common standard requiring only domestic legislation, rather than a multilateral treaty. This idea has been championed by Brazil, who have used their presidency of the G20 to push forward proposals on global wealth taxation and force the issue onto the table.
When is a wealth tax not a wealth tax? Wealth taxes can take many forms, such as an annual levy on net assets. But French economist Gabriel Zucman, the author of the G20 proposal, has suggested that a global standard should stay within “the realm of income taxation”. Zucman says that the reason the mega-rich usually pay such low effective tax rates is because they pay relatively little income tax. He argues this is because they minimise taxable income from investment dividends, avoid realising capital gains and also use holding companies and also use holding companies and similar structures to avoid tax. Zucman’s proposal aims to tackle this phenomenon by applying a top-up tax to the ultra wealthy should their income tax contribution be under a certain threshold. Wealthy people who already paid enough income tax would be unaffected.
Domestic implementation. Zucman suggests that the common standard could allow for flexible domestic implementation. As long as the minimum standard is met (for example, individuals pay taxes worth at least 2% of their wealth), individual countries could arrange things as they choose. At present, Zucman’s proposal doesn’t stipulate whether the money should be spent domestically or pooled to tackle things like inequality and climate change. What we do know is that US treasury secretary Janet Yellen has unequivocally said that she does not support these taxes being used to redistribute across borders. So for now, the focus is very much on domestic application.
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What has the G20 agreed?
The G20 finance ministers have not announced any concrete measures. After the meeting, they all signed a document reaffirming the G20’s commitment to reducing inequalities and promoting fairer taxation. The document applauds recent tax reforms in several G20 countries and encourages higher wealth taxes “with full respect to tax sovereignty”.
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Where do the different countries stand?
A few countries such as France, South Africa and Spain have shown some degree of public support for the proposal. In others, like the UK, wealth taxes might be gaining public popularity but less so among the political elite. But with an election looming in November, all eyes are on the US. The G20 proposal is compatible with Biden’s plan to tax the super-wealthy (at least 25% of annual income for billionaires), but this plan is of course at risk of being overturned by Donald Trump if he is elected later this year. However, as Zucman points out, we do not need all countries to adopt the 2% tax - simply a “critical mass” in order to “avoid a scenario where the ultra-rich flee to fiscal havens”.
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So what's next?
The good news for those who want to see fairer tax systems is that the G20 seems to have reached agreement on the diagnosis of the problem. The fact that the output of last month’s meeting focused so much on the role of progressive taxation in tackling inequalities and strengthening “fiscal sustainability” shows that fairer taxation is a priority for G20 countries. There is also a precedent for international tax cooperation with the recent move on minimum corporation tax levels. The bad news? There is very little in the way of a plan for next steps. A global tax agreement could be a key step towards reducing tax avoidance and making the murky finances of the mega-rich more transparent. But the likelihood of that happening any time soon hinges on what happens domestically in G20 countries in the near future – particularly in the US.
Accounting tinkering to create more fiscal space? The FT reports that Chancellor Rachel Reeves “decline[d] to rule out” changing the way debt is measured in assessing whether fiscal rules are being met (by excluding the losses made by the Bank of England’s sale of gilts), and said the government will “publish the precise details of the fiscal rules in the Budget” on October 30th. (Read our previous New Economy Brief for an explanation of the link between the pace of quantitative tightening and the government’s spending power.)
Labour’s ambitious plans for UK prosperity require a fiscal reset. Economist Josh Ryan-Collins argues that the government should “abandon its self-imposed fiscal straight jacket” to invest in “a strategy for rebuilding not just the physical, but also the social and health infrastructure of the country.”
Increase public investment to ‘kick-start the economy’. A new report from the National Institute for Economic and Social Research (NIESR) proposes increasing public investment to 5% of GDP (an extra £50bn per year). The authors argue this is “essential” for solving the four major issues that the new government has inherited – low productivity growth, declining living standards, persistent regional inequality and a “fiscal framework that is stifling much-needed public investment“.
An industrial strategy for public health? Poor health is damaging the economy. The final report from IPPR’s Commission on Health and Prosperity finds that UK workers are more likely than those in comparable economies to keep working through sickness, which costs businesses £25bn a year in lost productivity. IPPR propose a “bold pro-business health plan” to provide more regulation and tax incentives for businesses to create healthier working environments.
Addressing productivity constraints on small businesses. Economists Dani Rodrik and Rohan Sandhu have published a paper showing how policymakers can reorient the tools of industrial policy towards smaller enterprises. They “call on governments to play the role of an accelerator or venture capitalist“ by targeting firms with high productivity potential and removing the constraints that are slowing their growth.
Scotland's mission for net zero by 2045. Future Economy Scotland’s Laurie Macfarlane has published the first of a series of reports with economist Mariana Mazzucato to plot a course to a just transition to net zero by 2045. They identify four principles to underpin a mission-oriented strategy for Scotland: moving “from market fixing to market shaping”, “from sectors to missions, “from ‘investor of last resort’ to investor of first resort’”, and “sharing risks and rewards”.
A complex map of regional inequality. A new report by the Resolution Foundation assesses the state of geographic economic inequality facing the new Government. It finds that while employment and wage gaps between regions have fallen (at least at the bottom of the pay distribution), overall income, productivity and child poverty vary massively across the country.
