“It is important for all taxpayers, including the ultra-high-net-worth individuals, to contribute their fair share in taxes,” said the finance ministers and central bankers in a joint statement marking the conclusion of two days of meeting in Brazil.
Brazil, which this year is presiding over the G20, is spear-heading global discussions on taxing the ultra-rich with a specific aim of raising international funds to tackle climate change. While civil society has for some time been calling for a greater focus on taxing high-net-worth individuals (for example, Oxfam and the Tax Justice Network), followed by a call made by the ultra-wealthy themselves earlier this year, Brazil has led the charge on how such taxes can be coordinated internationally.
Setting an internationally coordinated standard for effective taxation of the ultra-rich
Economist Gabriel Zucman was commissioned by Brazil to prepare a report presenting a blueprint for “an internationally coordinated standard ensuring an effective taxation of ultra-high-net-worth individuals.” The proposal targets individuals with more than $1 billion in wealth who will be required to pay the equal of 2 per cent of their wealth as minimum amount of tax per year. According to Zucman, setting this minimum tax would raise $200-$250 billion annually from about 3,000 taxpayers globally, whereas extending the tax to centimillionaires would add $100-$140 billion.
According to Oxfam “the richest 1 per cent have amassed $42 trillion in new wealth over the past decade, nearly 34 times more than the entire bottom 50 per cent of the world’s population”. Yet despite this gap, billionaires currently pay an effective tax rate of just 0.3 per cent of their wealth says Zucman.
ICTD research finds low-income households often pay more than high-income ones
This contrast is also found in low-income countries in Africa where ICTD has been conducting a lot of research on taxing high-net-worth individuals (HNWIs).
A growing body of evidence suggests that Africans often make various informal tax payments (including various types of community levies, with payments made to community groups providing publicly available services or goods) which extract more money from low-income households than they do from high-income ones. Whereas other studies show that the majority of personal income taxes is collected from individuals in formal employment (i.e. who earn steady but modest incomes) who on average pay over 90 per cent of personal income taxes, while high-income professionals and wealthy self-employed individuals often go untaxed. In both cases the result is an under-taxation of the wealthy and over-taxation of low-income earners (See: Tax Compliance of Wealthy Individuals in Rwanda).
Legal frameworks for taxing the wealthy already exist but there is little political will for applying them
This inequality is not down to the lack of legal frameworks enabling the taxation of HNWIs, but rather is linked to the political affiliations of these people. ICTD Associate Research Fellow Jalia Kangave confirms that “[i]n the countries that we have worked in, strong legal frameworks exist. Indeed, in a number of cases, the wealthy are also publicly known. And while some countries may not have sufficient data to enable tax authorities to identify these individuals, in most cases, the main challenge is a political one. What we are finding in our research is that most of the wealthy are either politicians or politically connected”.
While the G20 countries did not see eye to eye about the global wealth tax, this should not render taxing the ultra-rich impossible as other tools already exist to this end such as taxes on capital gains, rental income, and property.
“ICTD research on the legal and administrative constraints to taxing the wealthy shows that much can already be done within existing frameworks, especially in lower-income countries,” asserts ICTD Executive Director Giulia Mascagni. “Especially in lower-income countries, much progress can be achieved by simply enforcing existing tax tools, before engaging in more complex processes to introduce new ones, like the wealth tax.”
For low-income countries, tax wealth is not the solution
Giovanni Occhiali, Research Fellow
Last week’s statement from the G20 finance ministers and central bankers on the importance of increasing ultra-high-net-worth individuals’ compliance with their tax obligations is a welcome development. However, the existing proposal to introduce a 2% tax on the wealth of US-dollar billionaires will do very little to address wealth and income inequalities across most low-income countries, since the majority of ultra-high-net-worth individuals reside in high-income economies. Taking Africa as an example, despite a population of over 1.4 billion (or around 18% of the global population), the continent hosts only 21 dollar billionaires (0.7% of the estimated world total) and 342 centi-millionaires (0.5% of the estimated world total). Hence, while increasing these individuals’ tax contribution is important, such a step won’t do much to address the continent’s pervasive income and wealth inequalities, which are often worse than those of other low-income countries.
Therefore, while the work of Zucman and his colleagues has proven essential to push the global conversation on wealth taxes and maintain momentum for their introduction, policymakers from low-income countries have little reason to hold their breath in anticipation. In fact, the current draft guidance document of the UN wealth tax subcommittee presents a more appropriate starting point for low-income countries’ governments currently considering the introduction of wealth taxes in their jurisdictions. This document speaks to the growing role of the UN in the tax space, as an actor focused on the needs of low-income countries rather than on those of advanced economies, and suggests that the UN body might be better placed to lead this conversation than the OECD.
Notwithstanding the potential of wealth taxes, I remain of the opinion that low-income countries would be better off focusing their efforts on improving the performance of existing tax measures that target sources of income relevant to HNWIs. As our research has shown, personal income taxes (other than those on formal employment income), capital gains taxes, property taxes and withholding taxes all significantly underperform across much of sub-Saharan Africa. Much of this stems from the lack of data necessary to their enforcement and from the political obstacles inherent to targeting the economic affairs of a country’s elite. Without solving both of these issues, there is little chance that any form of additional wealth taxation will be successful. Given these countries’ need to increase domestic revenue mobilisation quickly and fairly, this is where the focus should lie.
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