The rich want to be taxed more. An open “millionaire’s letter” signed by 83 super-rich individuals calls on governments around the world to introduce “immediate, substantial and permanent” higher taxes on “people like us” as a way to pay for the coronavirus recovery. Similar letters have appeared in the past, including one in January 2020 signed by 120 billionaires and millionaires demanding higher taxes. Two of the world’s richest men, Warren Buffett and Bill Gates, have joined the growing call for the rich to pay more tax. Are they right?
The world is facing an unprecedented economic crisis. The IMF predicts the worst global economic shock of our lifetimes will be “unlike anything the world has seen before”. The crisis could deepen and entrench existing inequalities. The debt burden on governments will be comparable to “war debt” and will likely need to be paid off over multiple generations.
Given all this, should the richest pay higher taxes? In the US in 2018, for the first time on record, the richest households paid a lower tax rate than almost anybody else in the country. In response, during her presidential run, Elizabeth Warren called for an “ultra-millionaire tax” on the richest individuals in the US. Yet, at the same time, many European countries have been abandoning so-called “wealth taxes” (in the 1990s, a dozen European countries implemented wealth taxes, today just three do). What’s going on?
What do our readers think? We had a comment from Markus, who argues that many people we consider wealthy are actually “asset rich but cash poor”, and that “wealth taxes might potentially bankrupt them and destroy their companies with all the jobs they create”. Is he right?
To get a response, we put Markus’ comment to Chiara Putaturo, EU Inequality and Tax Policy Advisor at Oxfam International’s European Union office. Is Markus right?
Without going into too much technical detail, when we are talking about taxing the rich more, we are talking about taxing wealth. And, actually, wealth can include a lot of things. So, not only cash but also, for instance, cars, the value of property, inheritance, and capital gains. So, even if a person is poor in cash, there are a lot of other wealth items that can be taxed.
It’s true that it’s sometimes difficult to identify them, because there is also an issue of transparency of this wealth and also an issue of transferring wealth offshore and abroad, So, we need transparency and cooperation among countries.
For another perspective, we put the same comment to Martin Ågerup, President of the Danish free market think-tank CEPOS. What would he say?
Well, I think Markus has a very important point here. A lot of people with wealth – when you read about how wealthy they are – it’s based on an assessment of what the market value of their company is. It’s a bit like saying: if you own a house that’s worth 200,000 US dollars you have 200,000 dollars. You don’t. You could sell the house, and then you would have the money, or you could borrow money using the house as collateral, but then you would have to pay interest on that debt and there’s a risk of you losing the house.
That’s the same for somebody owning a company. If you have to go out to borrow money to pay a wealth tax, then slowly you’re losing the control over your company. And that has implications, because that would mean if we create wealth taxes or inheritance taxes that have that result then the people who have been successful building businesses would slowly lose control over the businesses that they’ve been running successfully.
So, we need to be aware of that. Wealth taxation is, generally speaking, not a good kind of tax. It’s better to tax income. Capital is problematic to tax, because capital gains is something you create from investment, and we want more investment; we want private individuals, entrepreneurs, investors from within the country or coming from the outside to create new businesses, jobs, innovation, and productivity growth, and we don’t do that when taxing capital. We should avoid that.
Next up, we had a comment from Peter, who argues: “All multinationals should be forced to pay more tax. For decades there has been a race to the bottom concerning taxes for big companies. And the results are clear: less investment in infrastructure, less money for social security and more taxes for citizens.” Is he right?
How would Chiara Putaturo from Oxfam International respond?
Peter is perfectly right. He also understands the reason why Oxfam works on tax justice. Because when we have corporations and rich individuals that avoid paying their fair share of taxes, countries cannot afford to pay for public services such as education, health and social protection that have been so important during this crisis. So, this is the first reason why we work on tax justice.
Peter is also right in identifying the problem of tax avoidance by corporations. In particular, there are a lot of tax loopholes concerning digital companies – let’s think about Amazon or Microsoft. We don’t have a tax system that can tax them in a fair way, and so they have been able to pay really low taxes until now, and we have seen during [the pandemic] that they have been making even greater profits than before. So, it’s really an issue of fairness and justice to ask for greater contributions from them.
Finally, how would Danish economist Martin Ågerup respond?
No, I disagree with Peter here. If you have a market with competition (which is what we should be striving for always, not to have private or public monopolies) then the taxes that corporations pay, in the end, aren’t actually paid by the corporations.
When you have higher corporate taxes, you have less investment in the economy. Lower investment results in lower productivity growth, and therefore lower growth in wages. So, in the end, it’s actually employees who pay the corporate taxes, not the corporations. A thing can’t pay taxes, it’s always people who pay taxes. If we have a ‘petrol tax’, it’s not paid by petrol but by the people using petrol. It’s the same with corporate taxes, which aren’t paid by corporations but by either the owners of the corporations or the employees, and typically it will be the employees.
In my opinion, corporate taxes should be abolished altogether. So, I think it’s good we have tax competition that’s pushing down corporate taxes, because it’s a bad type of taxation. In the end, corporate taxes are a very small proportion of the total tax revenue in most countries. The contribution that corporations bring in terms of public revenue come from the taxes that the employees of the corporations pay through the jobs that they have because of the existence of the corporation and the investment that the corporation has made.
Do the rich pay too little tax? Or are wealthy individuals “job creators”? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!