The Cost of Being Rich: Is a global tax for billionaires coming?

Are billionaires paying their fair share?

Brazil certainly doesn’t think so.

The finance minister of Brazil, which is currently G20 president, has asked the other G20 nations to get behind a plan to get behind a global minimum tax.

“It’s an undeniable fact that the billionaires of the world are still evading our tax systems through a series of strategies,” finance minister Fernando Haddad told his counterparts in Sao Paulo.

“I sincerely ask myself how we as G20 finance ministers can allow a situation like this to continue.”

But what is the global minimum tax? How would it work? And how much money would it generate?

Let’s take a closer look:

What is it?

First, let’s look at the current global scenario when it comes to taxes.

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Critics of the current system say nations around the world are currently engaging in a “race to the bottom."

This is where some countries roll out the red carpet for corporations and the super-rich.

In such nations, the mega wealthy pay zero or low taxes.

Warren Buffett, for example, famously pointed out that he pays a tax rate lower than his secretary.

In 2021, G20 finance ministers endorsed a global tax-rule reform based on two “pillars” to make large multinational firms pay up.

Firms currently set up in tax-free havens like the Bahamas or the Caymans to avoid paying even a minimum of corporate tax.

However, taxing the firms wherever they make their sales rather than where they are incorporated would put an end to “digital tax-dodging.”

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The firms would pay a minimum corporate tax rate of 15 percent.

Countries are at different stages of implementing those reforms.

But now some nations are now pushing for a “third pillar” – the global minimum tax.

According to The Guardian, the EU Tax Observatory has called for a two per cent charge on the wealth of the richest.

This measure, which would similarly tackle tax evasion by the super-rich, would raise about $250 billion per year from 2,756 billionaires, the research group hosted at the Paris School of Economics said in its 2024 Global Tax Evasion Report.

According to ICIJ, Nobel Prize laureate Joseph Stiglitz, who wrote the foreword to the report, warned inequality would lead to dire consequences.

“If citizens don’t believe that everyone is paying their fair share of taxes — and especially if they see the rich and rich corporations not paying their fair share — then they will begin to reject taxation,” Stiglitz wrote.

Haddad, a close ally of Brazil’s leftist President Luiz Inacio Lula da Silva, cited the recent report by the Paris-based firm led by economist Gabriel Zuckman as saying that billionaires are paying an effective tax rates of zero to 0.5 percent on their wealth largely by using shell companies.

Zucman is an expert on the link between tax evasion and inequality.

Billionaires’ personal tax in the United States is estimated to be close to 0.5% and as low as zero in otherwise high-tax France, the Observatory estimated.

‘Risks undermining social acceptability of taxation’

“In our view, this is difficult to justify because it risks to undermine the sustainability of tax systems and the social acceptability of taxation,” the observatory’s director Zucman told journalists.

“Effective solutions to ensure the super-rich pay their fair share of taxes depend on international cooperation,” said Haddad.

The issue “could be the key to solving many of the challenges we face,” he added.

Brazil has invited a series of speakers to address the meeting on the issue including Zucman to speak on a slew of issues including inequality –another key area that Brazil wants to address in its G20 presidency.

The newspaper quoted Zucman as saying, “The idea is what we have been able to achieve with multinational firms – putting a floor to their effective tax rates – we should do the same for super-rich people.

“At the moment, nothing is being done in that space, of coordinated minimum taxation of individuals and the very wealthy in particular. But this is the beginning of the conversation.”

Oxfam’s tax policy chief Susana Ruiz added, “Just getting this on to the agenda at the G20 is a historic step.”

France lends support

France has thrown its support behind it as well.

France’s finance minister Bruno Le Maire told Reuters, “Currently the richest people can avoid paying the same level of tax as other people who are less rich. We want to avoid such tax optimisation.”

“We want Europe to take this idea of minimum taxation of individuals forward as quickly as possible, and France will be at the forefront.”

Maire told journalists Wednesday that Paris is pushing to “accelerate” international negotiations on a minimum tax on the ultra-wealthy.

“We have reached an unsustainable situation in which the richest 1 per cent own 43 per cent of the world’s financial assets and emit the same amount of carbon as the poorest two-thirds of humanity,” Zucman was quoted as saying by The Guardian.

Though a coordinated international push to tax billionaires could take years, the Observatory pointed to the example of governments’ success in all but ending bank secrecy and reducing opportunities for multinationals to shift profits to low-tax countries.

The 2018 launch of automatic sharing of account information has reduced the amount of wealth held in offshore tax havens by a factor of three, the observatory estimated.

A 2021 agreement between 140 countries will limit multinationals’ scope to reduce tax by booking profits in low-tax countries by setting a global 15 per cent floor on corporate taxation from next year.

“Something that many people thought would be impossible, now we know can actually be done,” Zucman said. “The logical next step is to apply that logic to billionaires, and not only to multinational companies.”

In the absence of a broad international push for a minimum tax on billionaires, Zucman said a “coalition of willing countries” could unilaterally lead the way.

Although the end of banking secrecy and the corporate minimum tax have put an end to decades-long competition between countries on tax rates, numerous opportunities remain to reduce tax bills, the report said.

For example the rich increasingly park wealth in real estate instead of offshore accounts while companies can exploit loopholes in the 15 per cent corporate tax minimum.

Meanwhile, governments are increasingly competing for investment through subsidies even though that is less harmful to their tax bases than competing only on low tax rates, the Observatory said.

US, UK unlikely to support tax

But some nations are still wary of such a deal.

This includes the US where the chances of passing a tax through the Senate, in which the Republicans have sizeable numbers, are close to nil.

US president Joe Biden’s 2024 budget included plans for a 25 per cent minimum tax on the wealthiest 0.01 per cent, but that proposal has since fallen by the wayside with lawmakers in Washington preoccupied with government shutdown threats and looming funding deadlines.

According to The Guardian, things aren’t looking too good for the tax in the UK either where the Labor party has vowed not to impose such a measure if voted to power.

Growing wealth inequality in some countries is fuelling calls for the richest citizens to bear more of the tax burden as public finances struggle to cope with aging populations, huge financing needs for climate transition and legacy COVID debt.

According to ICIJ, the report also called for strengthening the global minimum tax on corporations.

It said the law has been “dramatically weakened by a growing list of loopholes.”

“If the money stayed in corporations and they invested in new enterprises that would be one thing, but the money typically goes to rich people. Not taxing multinational corporations has provided a flow of wealth to a few people,” Stiglitz wrote.

Stiglitz claimed the tech firm Apple was a classic example of this.

“Money that would have gone to the people has now gone to rich individuals. We now have a responsibility to get it back,” he said.

Zuckman, regardless, remains confident.

He said there is a “growing recognition” for the need for cooperation.

“I’m relatively certain that at some point, one day we’ll wake up and the morning radio programme the top item will be countries reaching an agreement on a minimum tax on the very rich. I’m pretty confident. But it’s hard to know if this is one year, or five, or 10 or 20,” he added.

With inputs from agencies