Rich, richer, richest
Money brings happiness, so why not tax it heavily? Especially when the amount of money typically increases significantly each year, and little effort is required to maintain it. In short, this discussion concerns the affluent. A few years ago, the French economist Piketty already targeted the wealthy, but now various politicians in the Netherlands have also weighed in. The most notable recent action was proposed by the VVD and the NSC, calling for a global minimum billionaire tax. This is somewhat comparable to the well-known minimum corporate tax rate of 15% (Pillar 2) by the OECD, but for individuals rather than companies. Politically, this proposal comes from an unexpected direction, perhaps as a 'defensive' move: the most leftist parties are in favor of a millionaire tax and reinstatement of a wealth tax, which is entirely unappealing to the aforementioned parties. It's better to come up with your own signal, especially if it's not feasible for the time being (?).
Is this a good idea? I don't think so. However, it should be acknowledged that there is certainly a good reason to tax the wealthy more heavily in parts of the world, which is justifiable from a societal and ethical perspective. Several reasons for this include global poverty, the significant growth of wealth among the rich, the high level of income inequality globally, and to a lesser extent, wealth inequality. There are significant differences between countries in this regard, expressed in the so-called Gini coefficient. Countries like the United States are well known for their substantial income and wealth inequality, as is Russia. In the Netherlands, the tax pressure on capital income has risen sharply this year, with rates in box 2 and box 3 around 35%. We cannot say that wealth is taxed low. This is further amplified for income from shares by the corporate tax rate of approximately 25% that precedes any profit distribution. There seems to be little reason to tax wealth more heavily here.
The rationale behind a billionaire tax is not just that capital income should be taxed higher, but also that it would be relatively easy to shelter wealth in low tax countries or to emigrate to one. The former, putting capital in a low-tax country, usually has less effect: capital income is generally assigned to the taxpayer's country of residence for tax purposes. Therefore, relocating such capital has relatively little benefit. The situation is different for real estate investments, where the source state has taxing rights. Real estate is much more 'visible' than other assets and thus harder to evade taxes on. The other possibility mentioned is emigration to a low-tax country. Although possible, it is less commonly done due to strong ties to the country of long-term residence, for example, because the wealth is tied to a business based there. However, there are indeed several countries that are attractive for emigration, with Monaco and Switzerland being notable examples in Europe. The latter is particularly due to the so-called lump-sum taxation regime that leads to a very low tax burden for the very wealthy.
Back to the global minimum tax. Is that now a good idea? In my opinion, no. First of all, such a regulation is inherently complex, as we see with the aforementioned Pillar 2 tax, dubbed the most complex tax in the world. This is already problematic for companies, but for individuals, it is utterly impractical. Moreover, calls for simplification have been made for years; the opposite is achieved with this tax. Another point is that capital is invested in various ways and is often held in entities such as companies, foundations, trusts, SPF's, etc. This is exceedingly difficult to understand. In addition, countries would have to assess whether the tax pressure meets the intended minimum and levy additional taxes if necessary. I could go on listing complications. Then there's the question of how high the tax should be, especially: from what wealth should it be applied, and how do you calculate that wealth? Does business capital also fall under it?
Should we then do nothing? No, there is certainly a reason to act. For my part, a worldwide ban on so-called preferential tax regimes such as the Swiss lump-sum taxation could be considered. For the Netherlands, this would mean that the business succession facility would have to be significantly abolished. Secondly, I advocate a mandatory levy by the source state - at the distribution of income - on dividends, interest, and royalties of 15%-20%. This is easy to implement and ensures a reasonable minimum amount of tax is always levied. It must still be enforced worldwide. That's not too difficult: countries that do not implement these two arrangements end up on the OECD's blacklists and cannot be part of the so-called Inclusive Framework. Being on the blacklist is not fun for countries. As for the countries that do not participate, there is usually not much of a problem: a wealthy individual does not want to place his money there anyway.
Peter Kavelaars is a Professor of Fiscal Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.
