Gabriel Zucman: “We need a European wealth tax”

French economist Gabriel Zucman, interviewed by Alter éco, explains why and how the super-rich should be taxed more and better.

Published On: April 3rd, 2024
Is Global Tax Reform Stalling?

Gabriel Zucman at the World Economic Forum Annual Meeting 2023. ©World Economic Forum/Faruk Pinjo

Taxing the (very) rich? It’s something that European countries used to do. Before they gave up. These taxes were ill-conceived and easy to circumvent. Now the world is changing: NGOs established by billionaires are calling for higher taxes, and we are just beginning to understand how much money these could bring in. It is a necessary step for future tax reforms, and the moment is clearly right, since the debate is heating up globally. We join researcher Gabriel Zucman for some explanation and analysis.

Many European countries used to have a wealth tax. Why it has been now abolished almost everywhere?

Gabriel Zucman: The wealth taxes have disappeared because they worked very badly, they exonerated the wealthiest! The French case was exemplary: billionaires did not pay the wealth tax (ISF) because of the exemption of professional assets and the cap mechanisms. The same kind of problem was found throughout Europe. Because of their low tax base, these taxes resembled a kind of property supertax, affecting the rich more than the ultra-rich, which did not help to establish their legitimacy.

The second major concern was that Europeans did nothing to combat tax competition. People could avoid paying tax by relocating to low-tax jurisdictions. It was under pressure from such tax competition that one country after another abandoned their wealth tax.

The third problem is that the fight against tax evasion and fraud, and in particular the concealment of wealth in tax havens, is extremely weak.

Is the situation any different today?

Zucman: Yes, in part. Above all, we can learn from these past experiences. There are two ways we can analyse them. You can, for example, say that recent history has shown that we can’t tax wealth effectively and that we should abandon the idea. I prefer a more constructive approach, which consists of identifying the – very real – problems that arose and seeking to resolve them.

Even if it is far from perfect, since 2018 the automatic exchange of banking information has made it possible to limit the concealment of fortunes. When it comes to tax competition, there is a simple solution: we could say that someone who has lived in France for a long time and built up his fortune there will, if he leaves the country, have to continue to pay tax there for a few years – five to ten years, for example – after his departure.

This is made even easier by the fact that, thanks to data exchange, tax authorities now have the information they need to measure the income and assets of non-residents.

Finally, past failures show that the cap and exemption mechanisms for business assets should be abolished. Modern wealth taxation should be based on the market value of what you own, net of debts, with no exemptions or tax niches.

Why would a Europe-wide wealth tax be a good thing?

Zucman: Because the studies available for several European countries show that we have a problem of tax regressivity at the top of the distribution. In other words, the very rich pay relatively less tax than the middle classes. When you belong to the very wealthy, it’s easy to structure your assets in such a way that they generate little or no taxable income. Income tax, which is the cornerstone of progressivity, fails to tax very large fortunes properly.

This is why, in an ideal tax system, there is a progressive income tax, an inheritance tax and, as a third pillar, a tax on very large fortunes to compensate for the failings of income tax. These shortcomings are due to the fact that the very notion of income is not very well defined for very large fortunes, whereas the notion of wealth is better defined. We therefore need a European wealth tax for basic reasons of fairness and tax justice.

Progressive taxation works all the better at the federal level, quite simply because it limits the scope for tax competition. Furthermore, Europe needs its own resources to invest, in the ecological transition for example, and it is normal to start with those who are currently taxed less, in this case the very wealthy.

Are there estimates of how much revenue this would bring?

Zucman: This obviously depends on tax thresholds, the rates used, etc. In the Global Tax Evasion Report published at the end of last year, we simulated what a minimum tax of 2 percent could bring in if 500 European billionaires paid such a tax. The estimate came to around 40 billion euro. We can also lower the threshold, to a few tens or hundreds of millions of euro for example. In this case, the additional tax revenue would easily reach one point of GDP.

There are in fact several estimates, all of which point to revenue of around one point of GDP, which is far from enough to finance the ecological transition and social justice…

Zucman: Wealth tax will certainly not solve all problems. But it is necessary because it is difficult to reform taxation until everyone is convinced that the richest people are paying their fair share. This is a precondition for other reforms aimed at improving the progressiveness of income tax, taxing capital income appropriately, and so on. And then, one point of GDP is not negligible! Especially when it is levied on taxpayers who are structurally under-taxed.

How will the rich react to such a tax?

Zucman: For those who are inclined to leave, we can now track their wealth more effectively, and they will also be taxed after they leave, as I mentioned earlier. As long as there is lax tax control due to reliance on pure declaration, there will be under-declaration. But if tax authorities rely on the information provided by financial institutions to send out a pre-filled declaration, this will limit tax evasion.

Is there also a risk that they will invest less?

Zucman: If you tax them at 99 percent, it’s certainly a possibility! But if we’re talking, as is being mooted today, about rates in the region of 2 to 4 percent a year, the available studies don’t suggest that this would fundamentally alter macroeconomic savings and investment flows.

This subject is making headway in the United States, and the Organisation for Economic Co-operation and Development (OECD) is currently working on it… Is this a new window of opportunity?

Zucman: Yes, I think so. The subject is now even on the agenda of the G20 under the current Brazilian Presidency, which wants to make minimum taxation of the very rich a central issue. Last February, I was invited to present a paper to the G20 finance ministers on the need for and feasibility of a tax of this kind. Joe Biden wants to make the subject a cornerstone of the economic debate in his re-election campaign. After what has been achieved with regard to businesses, this is a logical step.

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