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As I wrote on Wednesday, net wealth taxes have been phased out in most countries that have had them, but Senator Elizabeth Warren has thrust it back on to the agenda in the US. Under her proposals, households with fortunes above $50m would pay a tax of 2 per cent of their net worth above the threshold and an additional 1 per cent surtax on net worth above $1bn. Such a tax would amount to a sea change in US tax policy. But even if it is almost unheard of there, it has a long history across the Atlantic, so it is worth comparing it with Europe’s experience of wealth taxes.
Warren’s proposal is in one way more modest and in another more ambitious than the few net wealth taxes still in existence elsewhere. It is more modest because a $50m threshold is so high that the tax would only apply to the top 0.1 per cent of household fortunes. In the three countries that retain a net wealth tax that includes non-real-estate wealth — Spain, Norway and Switzerland — the tax-free amount of wealth is only in the six digits (and in many Swiss cantons even lower).
Even so, Warren’s proposal is ambitious in that it would bring in a projected $210bn if it were in force for 2019, and $2.75tn over a decade, or about 1 per cent of US national income — as much as Swiss net wealth tax (with its very low threshold) and more than in Spain, Norway or France’s recently abolished tax on all wealth (President Emmanuel Macron having replaced it with a tax on net property wealth).
The contrast with the latter three countries is even larger when measured by share of total tax revenue, where the Warren wealth tax would amount to about 4 per cent (this mostly reflects the lower overall tax-take-to-GDP ratio in the US and Switzerland).
The large revenue-raising potential of the Warren proposal does not come down to dodgy calculations. Economists Emmanuel Saez and Gabriel Zucman have detailed a convincing basis for the estimate, drawing on the best available evidence on the effect of wealth taxes on taxpayer behaviour. Instead, the large amount reflects two things. One is the relatively aggressive rate of 2 to 3 per cent. Other countries start at a fraction of 1 per cent, and only Spain gets above 2 per cent as the top marginal rate.
The other, most important cause, is the extreme inequality of wealth in the US. Saez and Zucman’s calculations show that the top 0.1 per cent’s share of private wealth has tripled from 7 per cent in the late 1970s to about 20 per cent today. Yet their total tax burden — when expressed as a proportion of personal wealth, in accordance with the argument that tax should track ability to pay — is much lower than for the bottom 99 per cent of households.
This is not so much a US-specific aberration as merely the extreme expression of a trend that can be seen across rich countries.
The rise in income inequality and capital’s share of national income across the rich world since about 1980 has led to much more concentrated wealth holdings. Total net wealth has also risen, both in absolute numbers and (of more relevance) in proportion to national income — as shown in the chart below by Zucman with Thomas Piketty. In spite of this, however, government revenues from the taxation of net wealth have been stagnant or falling, in many cases to zero. Even property taxes have not increased notably as a share of OECD countries’ overall taxation.
A notable exception is Switzerland, where revenue from wealth taxes has risen in step with the increase in wealth, and which now generates almost twice as much as a share of national income than it did in the 1990s, according to the OECD.
There is a lesson to draw here, not just for the US but for European countries. The evidence shows that net wealth taxes can generate modest but not insignificant amounts of tax revenue even with low rates (as in Switzerland) or very high exemption thresholds (as in Warren’s plan). If countries without net wealth taxes are at all interested in their tax systems being responsive to the shifts in incomes and wealth that have happened since the 1970s, they should at a minimum look at (re)introducing wealth taxes. But all countries should also note that net wealth taxes have the potential of raising much more revenue than this — by combining Swiss-style lower thresholds with Warren-style rates. That sort of revenue could be used to lower, for example, income taxes on ordinary labour earnings.
There are, of course, challenges involved in setting up or increasing net wealth taxes. Next week I will write about theory and evidence for how these can be minimised, including a report from my trip to Switzerland to see how the net wealth tax works there.
● My FT colleagues have unearthed “Project After” — the UK government’s secret plan to rescue the economy from a no-deal Brexit.
● Arvind Subramanian writes that the debate on universal basic income in India “has gained such momentum that the question is no longer if it will happen, but what form it will take”.
● David Fickling points out an inconvenient fact for those who unsuccessfully lobbied the European Commission to approve the Alstom-Siemens merger to resist the threat from Chinese train construction: rather being squeezed by China, both companies are thriving on their own.
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