Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the pros and cons of a higher tax rate for wealthy people, called for at the World Economic Forum in Davos. “A higher tax rate for big fortunes can be an effective means of reducing wealth inequality and stimulating economic growth.”
“End the age of extreme wealth. Tax the ultra rich.” The open letter from The Patriotic Millionaires, a group of more than 200 American millionaires, left no mistake about the solution to the widening gap between rich and poor worldwide. The group pointed out that the ten richest men in the world doubled their wealth in the first two years of the pandemic, while 99 percent of the world’s population saw their income shrink. Their proposal: a progressive wealth tax worldwide - 2 percent for wealth over $5 million, 3 percent for wealth over $50 million and 5 percent for those who amassed more than a billion dollars.
What is the effect of more taxes on big fortunes? Does The Patriotic Millionaires’ proposal make economic sense? In principle, yes, says Knaap. And that has a macroeconomic and a political reason. “First, it is important to ask: what do people do with their money? Those with large fortunes appear to save and invest a large part of their wealth and thus spend only a small part of it. An ECB survey of French families shows that this effect occurs starting from 181,000 euros in assets. The more wealth is concentrated in a small group, the greater the risk of an economic situation where too little is spent. In that case, economic growth is jeopardized because there is a lack of demand. Therefore, if you succeed in reducing wealth inequality, you can stimulate economic growth. After all, people with less wealth spend a relatively large portion of it. For a measurable macroeconomic effect, though, a broad measure is needed. Taxing only the ultra rich will not have the desired effect.”
Influence for sale
The second argument for taxing big fortunes more heavily, according to Knaap, lies in the fact that political influence can sometimes be bought.
“Particularly in the United States, very wealthy people are disproportionately able to influence the political process. That results in government policies that at least don't make the rich any less rich. And what is good for a minority does not necessarily benefit the majority.”
So, a higher tax rate on large fortunes can be an effective means of reducing wealth inequality and stimulating economic growth. But there are a number of caveats to that tax approach, says Knaap.
“Multimillionaires are unlikely to work less hard if you tax their last million more heavily. But they are more likely to try to move those assets to Monaco, the British Virgin Islands or other places where tax authorities can't get to them. Incidentally, that has become a little more difficult by now. Thirty years ago, you could take a suitcase of money to Switzerland and then those assets were invisible. But more and more countries have converted in this respect. People who want to hide their wealth now have to go much further with it. Government pressure is increasing, partially because of the digital capabilities available today to track assets. But the higher the tax burden, the greater the incentive to get out from under it. People are inventive, and the really wealthy always have an army of tax experts to help them accommodate that wealth as favorably as possible from a tax perspective.”
Billions in assets
So, all in all, a progressive tax rate for very large assets is economically a good idea?
“Yes, but it will only be effective if that rate is applied not only to billion-dollar assets, but also to the group below that. Moreover, if you want this to happen it should be done globally, as much as possible, because wealth always finds its way to the place with the most favorable conditions. In any case, it seems that we are moving more and more in the direction of globally uniform rates. The same applies to the Netherlands. The positions of almost every political party reflect the need to increase tax revenues. And these are highest when opportunities to move assets to tax havens are limited.”