THE PANAMA PAPERS

The other way the rich will surely try to react to a tax rise, however, is by finding ways to not pay taxes.

One thing the absence of caps in European soccer and the resulting astronomical salaries does is encourage players to evade taxes.

The expose of the so-called Panama papers, which revealed the efforts of Panamanian law firm Mossack Fonseca on behalf of the global plutocracy in setting up hundreds of thousands of shell companies for them to evade taxes, showed just how pervasive tax evasion had become. The list of names included former prime ministers of Iceland, Pakistan, and the UK. Even in famously honest Scandinavia, only 3 percent of personal taxes are evaded on average, but the very rich are much more serious offenders. A study estimated that those in the top 0.01 percent in the wealth distribution of Norway, Sweden, and Denmark evade 25–30 percent of personal taxes they owe.⁶⁶

If taxes go up a lot, so will tax evasion. The question is, by how much? In the short run, the response will surely be substantial.

In part for this reason, a small number of politicians in the United States and some economists⁶⁷ are pushing for a progressive wealth tax applicable on worldwide wealth (in 2019, Elizabeth Warren proposed a 2 percent wealth tax on Americans with assets above $50 million, and a 3 percent wealth tax on those who have more than $1 billion). The idea is not new. After all, most Americans who own a home already pay a tax on the value of their home: the real estate tax they pay to their municipal government. But this tax is regressive. Suppose you own a house worth $300,000 and pay 1 percent property tax ($3,000). Then you will effectively pay 10 percent of your net wealth if you have a mortgage of $270,000 (since your net wealth is then $30,000) but 0.1 percent of your net wealth if you have financial assets of $2.7 million and no mortgage (since your net wealth is then $3 million).

The wealth tax would be progressive and apply to all forms of wealth, not just real estate. The advantage of a tax applied on very high wealth, from the point of view of fighting inequality, is that very wealthy people do not consume the vast majority of the income they derive from their wealth. Instead, they take a small fraction of the wealth income in the form of a dividend, and they plow the rest back into their family trust or whatever structure has allowed their wealth to accumulate. In the current tax codes in most countries, they do not pay any taxes on the amount that goes back into the trust.⁶⁸ This is part of the reason why Warren Buffet, as he likes to remind us, pays very little in income taxes.⁶⁹ It is difficult to have a redistributive income tax if most of the top incomes are effectively (and legally) shielded from taxation in this way.

Unlike estate tax, which got a bad rap after being called the “death tax,” the idea of wealth tax is very popular. In 2018, 61 percent of respondents to a poll conducted by the New York Times were in favor, including 50 percent of Republicans.⁷⁰ So it even may be politically feasible. Yet in recent decades many countries got rid of their wealth tax if they had one, and few countries have put one in place (Colombia is an exception). In France, getting rid of the wealth tax was one of the first actions of the centrist Macron government after his election in 2017. As we saw, this was a very dangerous political move; the abolition of the wealth tax and the attempt to put in place a surcharge on fuel was the original motivation for the Yellow Vest protest movement. In an attempt to quell it, Macron promised a number of giveaways, but did not reinstate the wealth tax.

There are two reasons why wealth taxes are so politically difficult. First, because of effective lobbying. High-net-worth individuals finance the campaigns of politicians on the left and on the right, and few are in favor of wealth taxation, even when they are otherwise quite liberal.

We should not lose sight of the fact, however, that all of this happens in part because the world tolerates tax evasion: most tax codes have loopholes galore and the penalties for parking money abroad are ineffective. As we saw, countries with a simple tax code with few loopholes lose less from evasion when taxes go up than the United States.⁷¹ Gabriel Zucman has convincingly argued that there are many relatively straightforward things that would help a lot in limiting tax evasion and tax avoidance. Among his ideas are to create a global financial registry that would keep track of wealth no matter where it is (making it possible to tax wealth no matter where it is parked), to reform the corporate tax system such that the global profits of multinational firms are apportioned to where they make their sales, and to more strongly regulate banks and law firms that help people evade taxes through tax havens.⁷²

Identifying a set of steps is of course not sufficient. There needs to be the political will to implement them. The three steps Zucman recommends may be particularly tricky since they involve international cooperation, and the men (yes, almost always men) at the top right now do not seem to be all that able to join together to get things done. Without that, countries may be tempted to engage in a race to the bottom in taxation in the hope of attracting talent and capital. Preferential tax schemes for high-skilled foreign workers have been introduced in Belgium, Denmark, Finland, the Netherlands, Portugal, Spain, Sweden, and Switzerland. In Denmark, for example, high-earning foreigners pay only a 30 percent flat tax for three years (against a top rate of 62 percent for the Danish). This was very effective in attracting high-income foreigners to Denmark, which may be good for Denmark, but bad for other countries. Now they have the choice between taxing their top earners less or pushing them to leave.⁷³ This tension between country welfare and global welfare in the design of individual income tax policy has loomed large in the debate about tax competition.

But the point is that these are political problems, not economics impossibilities. The spirit of this book is to emphasize that there are no iron laws of economics keeping us from building a more humane world, but there are many people whose blind faith, self-interest, or simple lack of understanding of economics makes them claim this is the case.