EU Proposes 2% Global Minimum Wealth Tax in Groundbreaking Report

Global Minimum Wealth Tax?

• The European Union Tax Observatory has recently published a report titled ‘Global Tax Evasion Report 2024’ that calls for a 2% Global Minimum Wealth Tax.
• This proposal comes at a time when income and wealth inequality are rising globally, and governments need additional revenue to fund social services and climate change initiatives. The report has sparked discussions around tax policy and equitable taxation.

The European Union Tax Observatory has released its inaugural ‘Global Tax Evasion Report 2024’, compiled by over 100 researchers globally. This systematic analysis of available data on international taxation comes at a pivotal juncture. With rising inequality, high public debt burdens, and urgent climate financing needs, governments require significant revenue mobilization.

However, loopholes enable widespread tax evasion, draining essential funds. This report represents the most comprehensive effort to date on evolving state of global taxation. It calls for bold reforms, including a pioneering 2% wealth tax on billionaires, to reconcile globalization and tax justice.

Global Minimum Wealth Tax Overview

Key Proposals and Findings of the Report

• Calls for a 2% Global Minimum Wealth Tax, expected to generate $250 billion annually from less than 3000 individuals.
• Finds that billionaires often pay effective tax rates between 0-0.5% of wealth due to use of shell companies.
• Highlights success of automatic exchange of bank information in curbing offshore tax evasion.
• Identifies limitations and loopholes in corporate minimum tax measures.
• Flags emerging forms of aggressive tax competition between countries.

Global Minimum Wealth Tax on Billionaires

The report’s proposal is a 2% global minimum tax on billionaires’ wealth. This measure is expected to generate approximately $250 billion annually from fewer than 3,000 ultra-high net worth individuals globally. The report justifies this modest 2% tax rate in light of the rapid growth of billionaire wealth, which has averaged 7% annually since 1995 after adjusting for inflation. The tax aims to ensure a minimum contribution from billionaires while addressing inequities in tax systems that currently allow many to pay less than 1% of their net worth in taxes.

Extremely Low Effective Tax Rates of Global Billionaires

The report reveals that billionaires often have personal effective tax rates ranging from 0% to 0.5% of their total wealth. This is facilitated by the opaque use of shell companies, trusts, and other mechanisms to conceal income and assets from taxation. By hiding wealth and incomes in complex structures spanning multiple jurisdictions, the ultra-rich minimize their income tax obligations in ways unavailable to average taxpayers. The proposed global wealth tax aims to curb such evasion.

Progress in Curbing Offshore Tax Evasion

The automatic exchange of bank information amongst over 100 countries has proven largely successful, shrinking offshore tax evasion by wealthy households by a factor of three over the past decade. However, the report identifies limitations, including non-compliance by some institutions and the shifting of funds to uncovered assets like real estate.

Corporate Tax Evasion Persists Despite Attempted Crackdowns

The report finds that profit shifting to tax havens remains substantial, with over $1 trillion shifted in 2022 despite attempts at reform. Loopholes have weakened the impact of G20 country agreements to enact a 15% global minimum corporate tax rate. U.S. multinationals account for around 40% of profit shifting.

Emerging Forms of Harmful Tax Competition

The report also points out the rapid spread of special tax systems that favor foreign individuals and their passive income. These systems are offered by countries to attract investment away from other countries. For instance, the number of such preferential tax regimes has increased from 5 to 28 across the EU and UK since 2007. This type of competition between countries using tax incentives rather than rates interferes with markets and lowers total tax revenue.

Implications of a Global Minimum Wealth Tax

Arguments in Favor

Revenue Generation from the Ultra-Wealthy

A Global Minimum Wealth Tax would raise substantial revenue specifically from billionaires to fund pressing social needs. With ballooning public debts, growing inequality, and huge climate financing requirements, governments urgently require progressive revenue sources. This targeted tax on the ultra-wealthy can generate funds without burdening average citizens.

Addressing Inequities

The tax helps counter tax avoidance by billionaires who often pay minimal effective rates. By ensuring a minimum contribution from the biggest beneficiaries of socioeconomic systems, it promotes fairness and social acceptability of tax policies.

Fostering Global Cooperation

The coordinated adoption of a global wealth tax would build international consensus and cooperation on combating tax evasion. It can help shift competition from a “race to the bottom” on tax rates towards a collaborative upholding of tax justice principles.

Concerns and Challenges

Implementation Difficulties

A Global Minimum Wealth Tax faces daunting challenges in agreement, coordination, and unified enforcement across many jurisdictions with complex financial systems. Billionaires have access to top resources to avoid taxes.

Potential Capital Flight

A poorly designed wealth tax risks capital flight to tax havens, reducing intended revenues. Safeguards must be crafted to prevent this consequence.

Effects on Investment and Growth

Some economists contend that wealth taxes can discourage business investment and hurt economic growth. However, the impact depends on the design of the tax and many contest such claims given modest proposed rates.

India’s Experience with Wealth Tax

• Background of Wealth Tax in India under Wealth Tax Act 1957.
• Coverage and exemptions under the law.
• Abolition of wealth tax in 2016 and reasons.
• Debates around reintroduction of wealth tax in India.

Background

India instituted a wealth tax under the Wealth Tax Act, 1957. The tax targeted individual net wealth above a threshold of Rs 30 lakh, excluding exempted assets. Rates ranged from 1-2% on wealth exceeding the threshold. The tax applied to individuals, HUFs, and companies. About 350,000 individuals fell under its ambit before abolition.

Coverage and Exemptions

Wealth tax covered cash, financial assets, movable and immovable property, luxury vehicles, jewelry, yachts, boats, aircraft, urban land, residential houses, commercial buildings, motor cars, shares, fixed deposits, bullion, utensils of gold and silver, etc.

Exemptions included one house or part (500 sq m), gold/jewelry up to Rs 2 lakh, property held for charitable purposes, assets of rural agricultural land, business assets, self-occupied immovable properties, cars/aircraft/yachts used for hire, compensatory tribal property, assets gifted through inheritance, etc.

Abolition in 2016

Wealth tax was abolished in 2016 during Current government’s first term, based on recommendations of the Finance Ministry and N.R. Narayana Murthy committee report.

Key reasons included high administrative costs compared to low revenues generated, expanding scope for evasion, declining tax-GDP ratio contribution, and detrimental effects on asset formation and growth. Wealth tax collections in 2014-15 stood at a meager Rs 968 crore against administrative costs of Rs 300-600 crore.

Debates around Reintroduction

Some policymakers, economists and social activists have called for reintroducing wealth tax to raise revenue from the super-rich and reduce inequality. Those against argue it penalizes wealth creators, has high compliance costs and spurs evasion through asset conversion. The feasibility, design and impacts of wealth tax remain contested in Indian policy space.

India Must Balance Revenue Needs, Growth and Equity

India faces the challenge of balancing revenue requirements, economic growth and equity. As debates continue on reintroducing wealth tax, India must objectively weigh costs and benefits. Revenue mobilization, investor perceptions, compliance burdens, evasion risks and administrative capacity require evaluation. A balanced, prudent approach is needed.

Way Forward on Global Minimum Wealth Tax

• Feasibility of global consensus on wealth tax remains uncertain but report highlights need for progressive taxation.
• India needs to balance revenue needs with growth objectives while ensuring equity.
• Tax policy reforms need to be calibrated and long-term for sustainable outcomes.

Uncertain Global Consensus

While achieving international consensus on a global wealth tax faces uncertainty, the proposal has sparked vital discussions. The report highlights the need to pursue progressive taxation to raise revenues while combating inequality. But reforms need careful, evidence-based analysis balancing multiple objectives.

Long-Term Reforms

Tax policy changes need careful calibration and impact assessment. Reforms should take a long-term view, upholding fairness while minimizing market distortions. Policy stability, transparency and compliance are vital for sustainable outcomes.

Final Thoughts

• The EU report adds valuable insights to global debates on taxation of the ultra-wealthy. Its analysis and proposals merit wider discussion even as implementation faces challenges.

The EU Tax Observatory’s proposed Global Minimum Wealth Tax has expanded global discussions on fair tax policies. The report thoroughly analyzes shortcomings in current tax systems and highlights the need for reforms. However, significant difficulties remain in implementing such a groundbreaking global tax. The proposal deserves ongoing debate although concerns over its feasibility continue. Its concepts offer important insights for policymakers seeking to balance growth, revenue, and fairness across countries.