The Rising Global Tide of Wealth Taxes

THE RISING GLOBAL TIDE OF WEALTH TAXES

Author: Madeleine Schubert

For some fresh views on the desirability and feasibility of wealth taxes, read our article!

Global political conflict between the left and the right wing has resulted in much debate on how an individual may acquire wealth and, in those cases where an individual has not acquired any, to what degree government must assist in levelling the playing field between the wealthy and the poor.

Historically, the right wing supported and promoted a market-driven economy focusing on individual initiatives, productivity growth and self-determination. In their view government's interference should be limited to the bare minimum. On the other side of the spectrum, the left wing supports the pack methodology, promoting collective negotiations implemented via unions and the continued support of social and political strategies to promote equity amongst all. They support strong government interference and believe that it must penetrate to the heart of the productive process.

However, as noted in one of well-known French economist Thomas Piketty’s earlier works, both sides agree that where the financial benefit that befalls an individual arises due to factors beyond the individual's control – like an inheritance or other windfall gain – one could consider actions to impose measures to move some of these windfall gains to the less fortunate.

Distributing wealth
In the current context this can imply the introduction of a wealth tax.

According to Wikipedia, a wealth tax (also called a capital tax or equity tax) is a tax on an entity's holding of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated business, financial securities, and personal trusts. The definition is then further expanded to permit the deduction of liability to result in a net position on which a tax is levied, therefore also known as a “net wealth tax”.

In simplistic terms, wealth tax is mainly driven towards an individual’s balance sheet. However, it is wider than that and can (and should?) include other indirect “assets” such as pensions and trust instruments.

The questions that one must now raise are:

• Is the introduction of a wealth tax a feasible method to equalise the distribution of wealth in a country and/ or globally?
• Has the imposition of wealth taxes worked in the past?

To find a response to these questions, reference is made to Thomas Piketty's book Capital in the Twenty-First Century.

Piketty emphasises that it is important to understand the capital/income ratio relating to individuals residing in a country. The ratio is an important indicator of inequality in their society. The higher the number, the higher the inequality in that country. Typically, in countries where the result is high the wealth is in most cases concentrated in old capital. Income generated from productivity then seldom achieves the same level of wealth.

In addition, in his view, he confirms that in the twenty-first century most wealth vests in private hands. This leaves the governments of countries with two options: to either borrow from the private sector or to tax the private sector. The private sector would prefer lending funds to government to earn more income from the same, as opposed to diminishing their wealth in the form of paying taxes. Currently Slovenia has the highest personal tax rate in Europe at 61.1%, indicating its move towards the left.

The option to leave
A noteworthy comment is that even though a country can impose higher taxes on the private sector, to date, individuals with means can opt to leave a country if the taxation system no longer suits them. The wealthy can elect to remain in tax-free havens and live off their capital, with the option to travel and enjoy a debt-free lifestyle without necessarily contributing towards the tax base of the country of which they are nationals. Although there are international taxation agreements that aim to regulate this position, many of the traditional tax havens are not party to this. In some European countries, like Switzerland, an individual may even negotiate their tax rates with a local municipal district. The latter luxury is often not available to individuals with low capital resources and those may often have to endure residing in the country of their birth, or opt to become migrant workers earning income in another country, without the means to initially create a substantial capital base.

A global tax on capital?
This brings one back to the way true wealth is transferred from generation to generation, being inheritance. Many wealthy families have over time understood the correct use of offshore trusts in tax-free zones, which own the family's passive investments and interests in multi-generational family businesses. Ultimately each generation builds on the family's endowment, which is protected against government inheritance taxes and other possible risks.

Piketty also alerts to the fact that in the current century, income divergence between individuals is greater than in previous eras. History shows that the wealthy never used to work; they lived from the income generated from their capital. Today the wealthy are fortunate to access the best education at the best schools and universities, have connections to secure the most lucrative business positions and earn the most income. One only needs to consider the pay of a top CEO in the USA versus that of a minimum wage earner in the same company. In South Africa similar numbers are often cited in the media.

Another suggestion that Piketty makes, which may be the ultimate route to go, is the globalisation of tax on capital for the wealthy. Such a tax will be raised regardless of tax residency or the entity holding direct or indirect interest of such a wealthy individual. However, as he rightly suggests, such a global tax may be the utopia, but this could be a step in the right direction.

If one considers the buy-in by countries into the Base Erosion and Profit Shifting (BEPS) Actions and the common reporting standard of the Organisation for Economic Cooperation and Development (OECD), as well as its USA equivalent being the Foreign Account Tax Compliance Act (FATCA), one may be moving closer to such a possibility in time.

The OECD Tax Policy Reforms report of 2020 assesses tax reform trends before COVID-19 and these may change due to the global economic crisis resulting from it. Nonetheless, the following are noteworthy:

• Personal income tax reductions continued.
• Corporate income tax rate cuts continued.
• Regarding international taxation, BEPS Action steps have continued to pick up momentum in an attempt to address global tax avoidance practices.
• There has been an increased focus on property taxation, showing a clearer trend towards increases in property taxation.

If one takes Piketty's view, and aligns it with the OECD 2020 report, it is noteworthy that there is a move away from looking at labour to continue funding governments and a slight trend towards increasing tax on capital. Of course, COVID-19 may have interrupted this trend, but at the same time it may just be the trigger that accelerates the movement towards a wealth tax.

According to a recent Business Insider article, Democrats in the USA have suggested the introduction of a wealth tax to curb the power held by the wealthy in the USA. Wealth taxes are not new, and in 1990 twelve European countries had this form of taxation. However, currently there are only four countries, being Norway, Switzerland, Spain and Belgium. Furthermore, the amount of taxes raised via this system has been minimal.

Administering a wealth tax
One of the main criticisms of this type of tax is that it is difficult to administer and often results in a flight of capital from the applicable country, with a change of tax residency often tied to it.

Locally, Judge Davis and the Davis Tax Committee have also been outspoken on this tax. They stated that while a wealth tax would add to the legitimacy of the tax system in a country with vast inequality, it would require significant institutional capacity that cannot be switched on like a light. In my view, they correctly state that administering a wealth tax will require a dedicated team to track down assets, some of which are not disclosed and are held via offshore trusts and structures. Something a global wealth tax may solve?

The global village
As to the feasibility of a wealth tax, it would be fair to state a response such as “it is complicated, but not impossible”. As the world is becoming a global village, the ultimate centralisation of governments into a single unit may result in a global tax system where individuals and structures cannot escape any form of taxation.

Please click here to complete the quiz. 

This article first appeared on Jan/Feb 2021 edition of Taxtalk