In today’s Finshots, we talk about French Economist Gabriel Zucman’s new proposal to tax billionaires and whether the idea that he thinks feasible will work.

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The Story

A few months ago, French Economist Gabriel Zucman made waves when he addressed the Finance Ministers of G20 nations at Brazil’s São Paulo.

His pitch?

A global minimum tax on billionaires to ensure that they don’t get away with not paying their fair share of taxes.

You see, taxing rich people is a conundrum for countries globally. That’s because it’s hard to figure out how much money they make.

A significant portion of what they earn comes from capital gains on investments which are often taxed at rates that are much lower than regular income tax. Even the rest of their income may simply never get taxed because they manage to park their money in tax havens, route it through shell companies that often escape taxes or trusts that are exempt from it.

In fact, they have at least $7 trillion hidden away in offshore accounts in tax havens outside their country. That’s 8% of the global household financial wealth! So, 80% of what the world’s wealthiest own ends up being hidden from governments.

This explains why they end up paying a measly 0.3% of their wealth in annual taxes, costing global governments a whopping $200 billion in lost tax revenue every year.

The end result is that a small fraction of the global population end up owning a majority of the world’s wealth. Over the last four decades in fact, this wealth has only grown at an average rate of 7.5% after taxes every year. So governments naturally have less to spend on development. And this massive wealth inequality simply strips the world’s majority of the privilege to economically uplift themselves.

So when Zucman proposed this new approach, everyone was interested. And since Brazil assumed the G20 presidency last year, it asked him to chalk out a blueprint on how countries could go about practically taxing the rich. And he did.

A few days ago he came up with a simple plan. If countries find it so hard to estimate how much their billionaires earn every year, just ask them to slap a new wealth tax on these folks. All they have to do is track the individuals that own $1 billion or more in assets like real estate, equities or company ownerships and get them to pay a minimum annual tax, equal to 2% of that wealth.

Doing that globally, he says, could actually raise close to $250 billion every year from about 3,000 taxpayers or even an extra $140 billion if you include the tax on centimillionaires or folks earning $100 million or more.

Here’s the thing though. Plans like these sound good only on paper. And getting approval from countries that represent the G20 can be a tall order.

But Zucman has a solution to that too. He says that this doesn’t really need any global consensus. It’s simply something that will work as an additional tax policy that would complement what a country already has in place.

And that’s why Brazil wants to keep his proposal open for debate at the G20 meeting this month.

But it seems like the debate has kicked off even before the meeting because the proposal seems to be receiving a lot of flak from some powerful G20 nations already.

For starters, the US has baulked at the plan. And its reasons seem genuine. Nine of the top ten richest people in the world belong to the US. And wealth tax like this could upset them. They could simply choose to spend their wealth instead of investing in businesses, research, and development. It also fears that this could encourage the wealthy to move to other countries and accumulate assets there. And that might actually backfire on its economic growth.

Not just that. Nodding to this plan could pan out badly for the Biden administration which currently helms the US government and wants to win another term in the country’s elections which are just a few months away.

In 2021 the Biden-led US government made a bold proposal to tax corporations at a global minimum tax rate. The idea is to tax all overseas income at a minimum tax rate of 15% and eliminate loopholes that allow companies to shift profits to tax havens.

Meaning, if you’re a US company trying to book your profits in a country like Ireland that boasts a lower tax rate of 12.5%, then the US will simply walk in and collect the extra 2.5% on your overseas income . And that will make sure that these companies pay their fair share of taxes.

And it’s not just the US. Germany, which has many family owned businesses, feels that a wealth tax like this could disproportionately affect these businesses, triggering layoffs and economic uncertainty. In fact, the country had to do away with wealth taxes in the past because of the challenges that came with implementing it.

So yeah, Zuckman’s proposal isn’t flawless. And without the political will of developed nations, especially the US, it's unlikely that other countries will adopt it. And it'll be exciting to see whether the proposal to implement a global minimum tax on billionaires attracts other G20 nations.

Until then…

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