Tax the rich with a wealth tax
“The taxation system has tilted toward the rich, and away from the middle class, in the last 10 years. It is dramatic, and I don’t think it’s appreciated. And I think it should be addressed.” So said the billionaire investor Warren Buffett 18 years ago. He illustrated his claim by surveying his office staff: although he was then the world’s second-richest person, he was paying a lower percentage of his income in taxes than his receptionist was.
Since then, economic inequality has only worsened, partly because of the rise of tech stocks, which are immensely valuable but do not declare dividends. Last month, a paper from the White House, coauthored by economists from the Council of Economic Advisers and the Office of Management and Budget, estimated that America’s 400 wealthiest families paid federal income tax at an average rate of 8.2% if gains in unsold stock are counted as income. The average American taxpayer paid 13.3% of their income in federal tax.
The US budget deficit, as a percentage of GDP, is now at its second-highest level since 1945. In poll after poll, Americans say that they want the rich to pay higher taxes, which would reduce the deficit and improve equity as well. Yet Congress does not raise taxes on the rich. Consider the egregious “carried interest” loophole in the US tax code, which permits investment fund managers to pay lower tax on the fees they receive from their clients, as if those fees were capital gains, rather than income. President Joe Biden has said that he wants the loophole closed, but tax reform proposals must pass through the House Ways and Means Committee, chaired by Richard Neal. In 2007 Neal supported an unsuccessful attempt to close the loophole. Then he started receiving big donations from the corporate sector. Last month, the House Ways and Means Committee released its tax reform proposals. Closing the carried interest loophole was not among them.
The conclusion is inescapable: the United States is no longer a democracy. It is a plutocracy. But countries in which money has less influence on legislation are also struggling to tax the rich. The Pandora Papers, released earlier this month by the International Consortium of Investigative Journalists, show how wealthy people in more than 200 countries and territories are keeping their assets offshore, many of them to avoid taxes.
When leaders of the G20 meet in Rome on 30 and 31 October, they are expected to endorse an agreement to tax large corporations at a minimum rate of 15%. But the agreement will be phased in over 10 years and has significant exemptions.
Is there anything else that the G20 could do about the tax inequity between the rich and most working people? Economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley, have suggested a wealth tax of 0.2% annually on the value of all publicly listed corporations’ stock. Such a tax, they note, is progressive, because the rich own a lot of corporate stock, and the poor own none. It is also difficult to evade. Saez and Zucman say that a wealth tax would not affect the availability of corporate finance, as publicly traded companies can issue more stock and pay the tax in kind to governments, which can then sell the stock on the market.
The opening of the global economy over the past 30 years lifted hundreds of millions of people out of extreme poverty, but it also enriched multinational corporations, which have been able to shift profits to wherever the corporate tax rate is lowest. The G20 can take one step towards remedying that by accepting the proposed 15% minimum rate, but that will leave untouched the wealth that comes from start-ups that are not making profits but still have soaring stock prices. The G20 countries can meet that problem by adopting a wealth tax along the lines Saez and Zucman recommend.