Are wealth taxes the best way to tax the ultra rich?

There have been calls to tax the rich ever since there have been taxes. One idea, though, arouses particularly fevered reactions: a tax on wealth, not just paychecks.

A clash over such a plan is now dividing France, where there was a raucous debate in parliament Friday over proposals for a wealth tax. But the approach has been roiling politics in the United States and Europe for years as inequality has risen to staggering levels and public debt has busted government budgets.

At the Labour Party conference in Britain in October, delegates called for a wealth tax. Surveys have shown three-quarters of Britons back the idea. Debate over the concept has been revived even in countries like Germany and Ireland that had previously repealed their wealth taxes. And the Tax Observatory, a research organisation funded by the European Union, has proposed a global minimum wealth tax of 2% on the world’s roughly 3,000 billionaires.

To supporters, taxing an individual’s total assets — stocks, real estate, yachts, diamond tiaras, race horses, art, fine wines, private islands and jets — rather than just income is one of the few ways to get people with dynastic wealth to pay their fair share.

It is also necessary, they argue, to dilute the increasing political power of the super rich.

To opponents, wealth taxes are outlandish penalties on innovation and productivity, and discourage investment and cripple growth. They would also be a logistical nightmare to administer, they add. How would government tax collectors go about assessing a family’s valuable collections of Ferraris, Picassos, NFTs and Birkin bags every year?

Wealth taxes, though not as common as some other levies, have actually been around for a long time. If you think about it, real estate taxes are one form of a wealth tax that target a particular asset.

In the 17th century, colonists in Massachusetts imposed a wealth tax on financial holdings, land, ships, jewellery and livestock. The first national wealth tax was imposed in the Netherlands in 1892. Colombia introduced one in 1935, as did India in 1957.

Wealth taxes were popular in Europe at times. Twelve countries had versions in 1990, although in many — including Germany, Sweden, Denmark Austria, Finland, Luxembourg — the taxes were later repealed.

Norway, Switzerland and Spain have wealth taxes, according to the Tax Foundation. France, Italy, Belgium and the Netherlands tax certain types of assets, though not overall net wealth.

The reasons for the repeals, as detailed in a 2018 report by the Organisation for Economic Cooperation and Development, included the difficulty of administration, the burden on people who owned valuables but had little available cash, and the minimal amounts of revenue raised.

But there has been a revival of support for wealth taxes on the ultra-rich in recent years, and much of it can be traced to three French economists — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — who did groundbreaking work starting in the early 2010s documenting the stunning concentration of wealth around the world. Globally, the top 1% own roughly 43% of the world’s total wealth, according to Oxfam.

In France, one proposal, a tax on households with a net worth of more than 100 million euros ($115.4 million), was aptly known as the Zucman tax. He estimates it would raise up to 20 billion euros from 1,800 households.

After an acrimonious debate in the National Assembly on Friday, multiple variations of that tax were defeated.

“We are against this tax mania,”
Laurent Wauquiez, a lawmaker for France’s conservative Les Republicans party, said of the Zucman tax. “By taxing everything, you’ll have nothing left to tax, and you’ll also discourage entrepreneurs and workers.”

François Ruffin, a left-leaning lawmaker, defended the tax saying it was a “measly 2%.” In eight years, “the fortunes of the 500 wealthiest families have doubled by 600 billion euros, by 100%,” he added. “We’re taking 2% from them, not leaving them 2%.”

In the United States, proposals for wealth taxes entered the mainstream during the final year of President Donald Trump’s first term. Senators Elizabeth Warren and Bernie Sanders, both presidential candidates, offered plans based on work by Saez and Zucman that they said were aimed at avoiding the shortcomings of failed European wealth taxes. And after President Joe Biden took office, Senate Democrats introduced a wealth tax aimed at billionaires, though it did not pass.

In 2020, Bolivia instituted what is arguably the best-named wealth tax — Impuesto a las Grandes Fortunas, or Tax on Great Fortunes — which applied to people with net wealth over $4.3 million.

Although concerns about inequality may prompt public support for wealth taxes, economic shocks and tight budgets historically have been the most common causes of their passage, researchers have found.

In the wake of the Covid-19 pandemic, Spain introduced a temporary “solidarity wealth tax” in 2022 on individuals with net assets above 3 million euros. It was later made permanent.

Slowing growth and intense budget pressures have further ratcheted up interest in wealth taxes.

Last year, the Brazilian government, which held the presidency of the Group of 20 nations, commissioned Zucman to devise a global plan to tax billionaires. That approach is intended to blunt worries that the super rich will take the money and run to a lower tax haven.

Whatever other objections critics of a wealth tax may have, fears that it would disrupt the economy and discourage the rich from working or innovating are overblown, said Abhijit Banerjee, a Nobel Prize winner in economics.

“There is evidence that they will do anything they can to dodge the tax,” Banerjee said, either hiding assets or moving. But there is no evidence they will work less. After all, professional athletes don’t reduce their efforts when there are salary caps.

“I think there is receptivity to wealth tax in many countries of Europe,” he said. And if governments would act together, the wealthy would have fewer places to escape to.

In France, after the tax proposals were defeated Friday, Zucman appeared on television and said, “I am not disappointed, because it will eventually happen.”

“There’s a huge demand by the public for a tax on billionaires,” he added. “All battles of this nature take time to win.”