The fallacies behind the case for low taxation of the rich

For those who defend the very wealthy, raising their taxes is unjustified and would hurt society as a whole. Little could be further from the truth.

Published On: March 28th, 2024

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The idea of raising taxes on the very rich is gaining ground. Simon Kuper, a columnist for the Financial Times, ran the headline “Time to tax billionaires” on 8 February. He went on to point out that the latest Forbes ranking lists 2,640 billionaires in the world, 19 times more than in 1987, and that they are taxed very little.

In the United States, President Joe Biden wants a 25% tax on the wealthy, defined as those with assets in excess of $100 million. The tax would be levied on their stock of wealth in the first year, and then on any subsequent annual increase in it. In France, the Mahfouz-Pisani report calls for taxing the wealthiest to pay for public investment needed to combat global warming. And Paul Magnette and Aurore Lalucq have launched their initiative for a European wealth tax.

Yet, the moment there is any talk of raising taxes on the richest, their defenders trot out arguments that purport to show what a bad idea this is.

Casting doubt

On the academic side, they are quick to cast doubt on the inequality scholarship that has been used to justify taxation. We saw this in late 2023 when a study attempted to discredit research by Thomas Piketty, Emmanuel Saez and Gabriel Zucman that showed a sharp rise in inequality in the United States.

According to an article published by economists Gerald Auten and David Splinter, inequality in the US has in fact been stable since the 1960s. Sure enough, America’s liberal commentators are now talking of controversy and questioning Piketty’s statistics.

On what grounds? The data provided by Piketty and others is based on income declared to the tax authorities, which is 60% to 70% of all income. There is no debate about these statistics: they clearly show that inequality is on the rise. But what about undeclared income (loopholes and tax avoidance)?

Piketty and his co-authors adopt a cautious hypothesis: they divide it up in the same way as declared income. Conversely, their detractors consider that the undeclared income is evenly distributed: when $100 of income is missing, Jeff Bezos and his secretary are each responsible for $50! This hypothesis seems odd and at the very least deserves some justification… which has not been provided.

The mantra of “too much tax kills tax revenue”

In France, the Macron milieu’s new star economist, Xavier Jaravel, writes in a recent book that the fight against inequality must not be fought by raising taxes. Why not? Because “too much tax kills tax”, naturally. When you tax people, they work less and so tax revenues fall. Jaravel adopts the view that as soon as we go beyond 60-70% tax for high-income households, we discourage the rich, and that the same is true beyond 30-40% of capital income. Yet a study by the Institut des Politiques Publiques shows that the tax rate for the very rich is around 26%. So there’s plenty of room for improvement!

Conversely, might lowering taxes on the richest boost economic activity by encouraging them to invest? According to the final assessment of France Stratégie on the replacement of France’s existing wealth tax (the ISF) by a tax on property wealth (the IFI), the latter has had no positive effect on the economy. There has been no increase in investment or boost to the real economy, but the new tax has significantly raised inequality. That is because dividends are up, and here 1% of tax households account for 96% of the amounts declared.

Similarly, in a recent survey by France’s Court of Audit, when taxpayers were asked what they would do if taxes were increased, only 22% replied that they would work less. (63% would reduce their consumption, which would be partly offset by the fact that 53% would also save less.) The same is true in the other direction: lower taxes would encourage only 21% of people to work more.

Another argument is that if we start taxing the very rich, they will move elsewhere. Indeed, following the replacement of France’s ISF wealth tax by the property-focused IFI, according to the above-cited France Stratégie report, “the number of returns [from abroad] of households taxed under the IFI exceeds the number of departures each year”, with a fall in departures and a rise in returns. But this statistic is based on such a small sample of people compared with all those affected as to make it unwise to draw general conclusions.

In any case, a putative European wealth tax would force those who reject it to move their wealth much further afield than just a few years ago. According to the Global Tax Evasion Report 2024 published by the EU Tax Observatory, in the early 2000s the wealth of individuals hidden in tax havens equated to 9% of global GDP. Today, it has fallen to 3%.

This is thanks to the introduction, from 2014, of the automatic exchange of tax data between the authorities of more than a hundred countries. Switzerland was the main destination for this money until 2007-2008, with a market share of 50%. It now attracts just 20%, with some of the difference going to Hong Kong and Singapore.

Of course, there are always ways of avoiding tax. Some banks choose to take the risk of continuing to offer their opaque services by not declaring their foreign customers. Shell banks are set up that do not disclose any data. Some taxpayers buy false nationalities, or slice and dice their transactions to stay below the reporting thresholds.

The report also indicates that a quarter of the financial assets hidden in tax havens have been transformed into undeclared property assets. An OECD report from July 2023 states that “the holding of real estate abroad has increased significantly over the last decade”, in particular for the purpose of circumventing the exchange of information on financial assets. “Progress on international tax transparency in real estate still leaves something to be desired”, notes the report, before proposing ways forward. In short, officialdom has already spotted the new smuggling routes.

This whole discussion often seems to be underpinned by one unchallenged premise: that the richest people will leave the country at the first sign of a tax hike. That assumption is not backed up by a recent study of the UK and another of Sweden and Denmark. In reality, when the very rich are faced with tax rises, only a tiny proportion of them migrate abroad.

Finally, when cornered, the champions of the rich will often resort to armchair psychology. At heart, they say, the wealthy are just victims of envy and jealousy. Let our columnist from the Financial Times reply: *Feel free to diagnose me as jealous of billionaires. That does not change the question: does taxing them benefit society?” As Simon Kuper and this briefing clearly show, the answer is yes.

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