Don't Mess With Taxes

Mega yachts in Portofino, Italy, a favorite harbor of the rich. (Photo by Ricardo Gomez Angel on Unsplash)

The Internal Revenue Service announced last week that it had collected $160 million in back taxes from wealthy taxpayers.

But that's just a pittance of what tax collectors globally could get if an international tax on billionaires is enacted, according to a European tax policy research group.

The super-rich typically use complex business structures to avoid taxes, notes the European Union (EU) Tax Observatory, an independent research laboratory hosted at the Paris School of Economics. That leads to most of us in the much-less-wealthy tax brackets paying higher rates than the very wealthy, according to the group.

To offset that, the EU Tax Observatory's latest global tax evasion report, argues for, among other things, a global minimum tax on billionaires that would be equal to 2 percent of their wealth. It estimates the wealth tax would raise close to $250 billion a year.

That tax revenue would come from the estimated 2,500 billionaires around the world who have a combined wealth of $13 trillion.

Sharing financial data cuts into tax evasion: The report also recommends expanding the existing level of information sharing among countries and financial institutions.

The sharing already in place since 2018 has led to a notable decline in offshore tax evasion, according to the report. The equivalent of 10 percent of world gross domestic product (GDP) is held in offshore household financial wealth, says the report, but now only about 25 percent of it evades taxation.

"This reduction in noncompliance is a major success that shows that rapid progress can be made against tax evasion if there is the political will to do so," write the report coordinators Annette Alstadsæter, Sarah Godar, Panayiotis Nicolaides, and Gabriel Zucman.

Wealth vs. income tax: The EU report recommends a wealth tax rather than an income tax because global billionaires typically benefit from very low effective tax rates, usually between 0 percent and 0.5 percent of their wealth.

In the United States, for example, the effective personal tax rate of billionaires appears closer to 0.5 percent. In France it is closer to zero percent.

"When expressed as a fraction of income and considering all taxes paid at all levels of government beyond personal taxes (including corporate taxes, consumption taxes, payroll taxes, etc.), the effective tax rates of billionaires appear significantly lower than those of all other groups of the population," says the report.

A key reason for these low billionaires effective tax rates is that in many countries they can use personal wealth-holding companies to avoid the income tax. These holding companies that then distribute dividends are in a grey zone between avoidance and evasion, argues the report. "To the extent that they are created with the purpose of avoiding the income tax, they can legitimately be seen as closer to evasion," say the report authors.

Some countries, including the United States, do tax as income the dividends earned through personal holding companies, but not all.

A wealth tax would offset this global income tax disparity between billionaires and the rest of us, according to the report.

"The number of taxpayers affected by our proposal is very small, and the tax rate for these taxpayers (2%) would still be very modest – for comparison, the wealth of global billionaires has grown at 7% a year annually on average since 1995 (net of inflation)," according to the report. "Even so, the revenue potential is large, due to the concentration of wealth at the top of the distribution and the low current tax rates of billionaires."

Six global tax recommendations: Overall, the UE Tax Observatory's 2024 report recommends six steps to address global tax disparity and evasion.

The suggestions' common theme is collecting more from multinational companies and wealthy individuals who now have myriad ways to avoid and evade tax liability. This would not only generate large amounts of government revenue, but also contribute to increasing the social sustainability of globalization, argue the report's authors.

The six proposals are —

1. Reform the international agreement on minimum corporate taxation to implement a rate of 25 percent and remove the loopholes in it that foster tax competition.
2. Introduce a new global minimum tax for the world's billionaires equal to 2 percent of their wealth.
3. Institute mechanisms to tax wealthy people who have been long-term residents in a country and choose to move to a low-tax country.
4. Implement unilateral measures to collect some of the tax deficits of multinational companies and billionaires in case global agreements on these issues fail.
5. Move toward the creation of a Global Asset Registry to better fight tax evasion.
6. Strengthen the application of economic substance and anti-abuse rules.

Some of these policies build on existing international frameworks and are implementable in the short or medium term, according to the EU Tax Observatory. Others take a longer-horizon perspective.

But the European tax researchers strike an optimistic tone, as indicated in the report passage below. The bold-face emphasis is the Observatory's.

Given the interest that some economic actors have in preserving the status quo, insisting on unanimity from the get-go severely limits the realm of possibilities. Instead, recent history shows how unilateral action (or multilateral action by a leading group of countries) can pave the way for eventually nearly global agreements. Unilateral action, if it is well-founded economically, can accelerate rather than impede global cooperation. We provide a detailed discussion of the practicality and revenue potential of unilateral measures to tax high-net-worth individuals and multinationals. Contrary to a widely held view, ambitious measures are possible even absent international coordination.

You also might find these items of interest:

• Global tax losses on crypto holdings is likely tens of billions
• U.S. Tax Gap grows to $688 billion per latest IRS calculations
• New report predicts $4.7 trillion in global tax avoidance and evasion losses over next decade

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