Tax the Rich: Can It Make Any Dent on a Long Slide in the Economy?

There is a growing public debate on a wealth tax. Several market analysts reported that billionaires added more than $4 trillion to their wealth during the unprecedented pandemic. If you look at the other side of the coin, during the same period, the crash in the international tourism industry among the most hit industries during the pandemic caused a loss of $4 trillion. 

The US Congress authorized $4 trillion in the Covid relief packages. However, the U.S. federal government ran a deficit of more than $3.1 trillion in the fiscal year of 2020, triple the deficit for 2019. It accounts for 15% of GDP and the highest level since World War II. Globally, $16 trillion worth of fiscal measures to pay for the pandemic would come due around the globe as public debt surges. 

But who is going to pay for pandemic-related government losses? Unfortunately, taxpayers shall bear the costs of Covid for decades. It is a hard lesson that we have learned from the pandemic although it would take for a while until we realize the real fiscal impact. We all hope that we will soon see this pandemic end. However, the burden of debt is no longer bearable if the pandemic becomes the norm. 

The richest 1% owns close to half of all global wealth for now and it is on track to two-thirds by 2030. The wealthy individuals often find a way to reduce how much taxes they pay and most of them do it legally by leveraging many laws and tax loopholes. As long as they adhere to the law, there shall be no issue. But it may not look like a fair game when you see that some billionaires pay almost no taxes. Now the rich has become the target. 

The concept of wealth tax is nothing new, but has quickly re-emerged after the pandemic began and gave lots of pressure on sound fiscal management due to public health measures. After two World Wars, an one-off wealth tax was levied in many European countries and also in Japan to fund recovery. Few countries have recently enacted the new law and started charging a wealth tax, which could feel utterly progressive to some taxpayers. Argentina passed a tax on the wealthy to pay for medical supplies and relief measures amid the ongoing pandemic. 

In the public domain, UN Secretary General António Guterres has urged a tax on the rich who profited during the pandemic. The IMF has also joined the band of nations to support a wealth tax to help cover the cost of pandemic. Many governments also consider levying a higher tax for what people earn and also what they own as a potential venue to increase revenue and fund their relief packages. In contrast, Nobel Prize laureate, Angus Deaton, has warned once a wealth tax is introduced to pay off pandemic debts, it would likely stay in and become permanent. 

The government will be in trouble again if the economy is in a downward spiral due to the mounting costs of another pandemic and its aftermath. A well-designed tax could raise significant uplift in revenue in a fair and optimal way without administrative headache. Many believe that an one-off wealth tax could encourage people who have ability to pay their dues, while not discouraging people who should work and mostly live on their little salaries as their primary source of income. 

For general public sentiment during the pandemic, an one-off wealth tax seems to be the most plausible route for any tax rise. Though, the majority of taxpayers who would be liable for this type of tax rise would be people in their 50s and 60s who still have to work to pay their bills. 

A wealth tax is similar to a real estate property tax. But not like a property tax, a wealth tax covers all wealth an individual owns. Therefore, it is often criticized as the more you have, the higher tax you have to pay, whether it is a simple one time tax or it becomes a broad and permanent tax scheme with lower exemptions and higher tax rates. 

Reforming existing taxes on capital and financial assets will be continuously considered to raise revenue for the governments around the globe. Revenue from a wealth tax, for example, made up 3.79% of total tax revenue in Switzerland in 2019. However, it still comes at a cost. This revenue increase does not necessarily imply that a wealth tax is the best way to achieve possible policy aims, either. An one-off wealth tax will be assessed on the open market value of the assets on a given date and it could create a lot of fireback.

Administering a wealth tax is inefficient because private wealth is inherently more difficult to measure. Wealth tax is tricky to administer for privately-held assets that are not liquidable. It is hard to quantify true market value if there is no existence of publicly listed comparable. Many startup entrepreneurs, for example, own companies that are not publicly traded yet, especially in their critical early growth phases. A significant tax obligation may stick to them with a potentially large sum of tax liability based on a notional estimate of their company’s value, which is, in definition, illiquid or not equivalent to cash yet. 

Therefore, if there is no way startup entrepreneurs could cover their wealth tax obligation of privately-held companies, in the worst case, wealth tax could force the owners of private companies to sell their businesses earlier than they normally would do in order to pay the taxes they owe.  

A wealth tax will distort economic behavior in a way that is harmful to overall economic growth and the nation’s prosperity. For example, by taking a fraction of people’s wealth each year, this tax could reduce the return to investing and discourage saving. This can seriously affect economic growth because investing activities and capital accumulation, which are critical for entrepreneurship and innovation, are now exposed to a higher tax risk. To the extent that entrepreneurial talent is important to success for both individuals and the nation, a wealth tax can damage innovation and further job creation.

Benjamin Franklin once said that in this world nothing can be said to be certain, except death and taxes. In most OECD countries, tax issues have been predominantly and will be continuously on public political agendas for several decades. The Covid-19 pandemic and its economic aftershocks shine a light on economic inequalities and hit hardest the people in poverty. 

Our current way of taxing the wealthy is yet far too complicated which could lead to resentment and tactical avoidance. We need a better way. We should be committed to a fair and efficient tax scheme. The wealthy could pay their fair share by reforming the dividend tax, pensions or other business disposals, for example, to make the tax system fairer and more sustainable.

Policymakers should stick to the tax system that is fair and optimal. Other policies could encourage the wealthy to voluntarily contribute to society, but not force them. An income tax surcharge on high-income households could be quickly implemented but won’t be enough anyways, 

Many nations would need more tax revenues and special interests can easily get government favors in these emergency situations. But none of these would justify a wealth tax, which could damage entrepreneurship and innovation, the engine of economic growth. A wealth tax would both fail to accomplish the goal of effectively raising new revenue and also deliver a devastating blow to domestic growth and prosperity of the nation in the long-run.