Biden’s billionaire tax hits the super-rich. Can a wealth tax work?

Calls for a wealth tax on the world’s super-rich are again gaining attention after US President Joe Biden said he would introduce a new “billionaire tax” on the country’s richest people if re-elected in November.

In laying out his 2025 budget proposals Monday, Biden took aim at the ultra-wealthy and reaffirmed plans to impose a 25% tax on Americans with more than $100 million in wealth.

“No billionaire should pay a lower tax rate than a teacher, sanitation worker or nurse,” he said last week in an address to the nation.

Plans set out earlier in the presidential order Budget 2024has renewed a decade-long debate about how best to account for the wealth of the world’s richest people.

But the issue has taken on new significance this year as governments around the world look for new ways to stem shrinking public finances and tackle wealth inequality.

Last month, world finance ministers meeting at the G20 summit in Brazil said they studying plans a global minimum tax on the world’s 3,000 billionaires to ensure the 0.1% of the ultra-money rich pay their fair share to society.

Even some of the world’s richest people support such ideas. In early 2024, a growing network of so-called patriotic millionaires signed the agreement. Open the letter world leaders, calling for higher taxes on the rich. Among 260 signatories They are Disney heiress Abigail Disney and Legacies star Brian Cox.

“It’s about the rich contributing more to society, and the extremely rich contributing more and being proud of it,” Phil White, a retired business owner and fellow Patriotic Millionaires member, told CNBC.

But experts are divided on the effectiveness of a wealth tax and how achievable it actually is.

A wealth tax is a “broad” tax on the value of all—or most—of the assets owned by a wealthy person or household, such as cash, property, vehicles, jewelry and other items of value.

Unlike income tax, which is levied on annual income, and capital gains tax, which is levied on profits made from the sale of an asset, a wealth tax is seen as a more holistic way of accounting for a person’s total wealth.

Such taxes were once widespread in Europe, but their implementation declined at the turn of the 21st century due to questions over their effectiveness and a wider move to lower top tax rates.

As of 2024, Switzerland, Norway, Spain and other countries are among the few countries that will introduce some form of wealth tax. But more and more countries are coming to this idea. Colombia introduced a wealth tax in 2022, and the Scottish government, among others, has made similar proposals.

According to Arun Advani, associate professor of economics at the University of Warwick, the most effective wealth tax policies are those that are targeted and specific.

“If you want a wealth tax to be really effective at the top level … you typically need to start at a fairly high threshold,” Advani said, noting that historically rejected policies have either been too low or allowed too many exceptions. to generate sufficient tax revenue.

However, tax experts note that even well-designed wealth tax policies can be difficult to enforce in practice, raising questions about which assets should be taxed and who should be responsible for assessing their value.

Indeed, the potential for behavior change is one of the main arguments against wealth taxes. Critics point to the increased risk of wealth flows among the highly mobile super-rich, including to tax havens, which they say undermines initial efforts to boost government coffers.

“We certainly see people looking at other countries to see if they had a wealth tax, would it make sense to move?” said Christine Cairns, tax partner at PwC.

In 2022, when Norway increased its wealth tax on residents with assets exceeding NOK 20 million ($1.8 million), many flocked to Switzerland. Entrepreneur Tord Kolstad was one of about 70 super-rich Norwegians who moved in 2023.

“They doubled this taxation day after day. This is the reason why Norwegian business owners are forced to leave the country. This has a big impact on many people, including me, and it is not sustainable in the long term,” said Kolstad, founder and CEO of Norwegian real estate group T. Kolstad Eiendom.

Researchers are divided on the risk of capital flight from a wealth tax, with some arguing that cash outflows would be limited. But they raise other concerns about the costs of such policies and their ability to redistribute wealth.

Data shows that the wealth tax is only very small share total tax revenues in the countries where it was applied. Often these revenues have failed to increase significantly over time.

“The tax authorities will have to pay more because they will definitely have to do more assessments,” Advani said. “Another area of ​​cost you might be concerned about is how it will affect incentives to invest, for example.”

However, proponents argue that revenue raised from a wealth tax could be an important step in combating the wealth gap.

Global wealth inequality has increased significantly in recent years, with the top 1% owning two-thirds of all new wealth created since 2020. according to to Oxfam. The poorest 50% of the world’s population now owns only 2% total net wealth, and the richest 10% own 76%. Of these, the richest 1% own approximately two-thirds.

Under Biden’s proposals, a 25% tax on those with more than $100 million would raise $500 billion over 10 years to fund benefits such as child care and paid parental leave. This will raise the average tax rate for 1,000 Americans. billionaires from 8.2% and bring it into line with 25% paid according to Biden, by average American workers.

Even imposing a 2% tax on the world’s 2,756 known billionaires could generate $250 billion a year, according to the study. report for 2023 from the EU Tax Observatory, an independent research laboratory that supports calls for a global wealth tax. Separate Oxfam report in 2023, it was estimated that a 5% tax on the world’s multimillionaires and billionaires could raise $1.7 trillion a year—enough to lift 2 billion people out of poverty.

Groups like Patriotic Millionaires say this is part of their stated goals. A 2024 survey More than half (58%) of G20 millionaires support a 2% tax on wealth over $10 million, according to Patriotic Millionaires. Three-quarters (74%) said they support raising taxes on the wealthy overall.

But some have questioned whether such calls could be a way for the world’s richest people to protect themselves from more radical redistribution of wealth in the future.

“There are people who talk very seriously about the idea of ​​libertarianism and say that there is a limit to the total wealth that people should be allowed to have, and something like a 100% tax on top of that,” Advani said.