Billionaires should pay a minimum global tax rate, equal to 2% of their Wealth, says a new 2024 Report by The EU Tax Observatory. 

The research estimates that the revenue potential of this measure would be close to $250 billion (from less than 3,000 individuals) annually. 

Personal tax rates (which include all individual income taxes and wealth taxes when they exist) are equivalent to 0% to 0.5% of an individual’s wealth currently. In a country like the US the effective personal tax rate of billionaires appears closer to 0.5%, while in a country like France it is closer to 0%. 

There are around 2,500 billionaires with a combined wealth of $13 trillion. 

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“When expressed as a fraction of income and considering all taxes paid at all levels of government beyond personal taxes (including corporate taxes, consumption taxes, payroll taxes, etc.), the effective tax rates of billionaires appear significantly lower than those of all other groups of the population,” the report cites.

WHAT IS THE EU TAX OBSERVATORY?

The EU Tax Observatory is a research laboratory hosted at the Paris School of Economics, which conducts research on taxation with a focus on international tax issues. It says over 100 researchers were involved in this new study.

In addition to a minimum personal tax, the report also recommends that a strengthened global minimum tax on multinational companies, free of loopholes, would raise an additional $250 billion per year. 

It says large amounts of profits are shifted to tax havens: $1 trillion in 2022. This is the equivalent of 35% of all the profits booked by multinational companies outside of their headquarter country. 

And it notes that the corporate tax revenue losses caused by this shifting are significant, the equivalent of nearly 10% of corporate tax revenues collected globally. US multinationals are responsible for about 40% of global profit shifting, and Continental European countries appear to be the most affected by this.

IS A 2% BILLIONAIRE TAX REALISTIC?

A senior policy adviser at the EU Tax Observatory, says although implementing a 2% global tax sounds “utopian” so was the notion of Swiss banks exchanging tax information with tax authorities ten years ago, but “this has now become central to the fight against tax evasion,” he tells the BBC.

Due to the automatic exchange of bank information, the advisor says offshore tax evasion has declined by a factor of about three in less than 10 years. And although around 10% of world GDP still remains in offshore household financial wealth, only about 25% of it evades taxation now.

One of the key reasons why billionaires tend to have low personal effective tax rates is that in many countries they can use personal wealth-holding companies to avoid the income tax. 

In these countries, using a holding company allows wealthy owners of publicly listed corporations that distribute dividends to avoid paying taxes on these dividends. But the report says these holding companies are in a grey zone between avoidance and evasion. Some countries like the US do not tolerate this and automatically subject dividends earned through personal holding companies to the income tax. 

But offshore tax avoidance remains due to two key reasons.

WEALTH OR PROPERTY

Firstly, it remains possible to own financial assets that escape being reported on, whether it’s due to non-compliance by offshore financial institutions or to limitations in the design of the automatic exchange of bank information. Many offshore financial institutions comply with their requirements, but others aren’t so strict.

Secondly, not all assets are covered by the automatic exchange of bank information. Individuals wanting to put financial assets in offshore banks have shifted holdings to non-covered assets, most importantly real estate, for example.

GLOBAL WEALTH DECLINES

But, despite calls for greater taxation the picture of global wealth is not so rosy overall. In the new Global Wealth Report 2023, created jointly by Credit Suisse and UBS, it reveals that global wealth has declined for the first time since the global financial crisis of 2008. 

Measured in current nominal US dollars ($), total net private wealth fell by $11.3 trillion, (down 2.4%) to $454.4 trillion at the end of 2022.

Wealth per adult also declined by $3,198 (falling 3.6%) to reach $84,718 per adult at the end of the year. Much of this decline comes from the appreciation of the US dollar against many other currencies.

Financial assets contributed most to wealth declines in 2022 while non-financial assets (mostly real estate) stayed resilient, despite rapidly rising interest rates.

In terms of geography, the loss of global wealth was heavily concentrated in wealthier regions such as North America and Europe, which together shed $10.9 trillion.

Asia Pacific recorded losses of $2.1 trillion, while Latin America is the outlier with a total wealth increase of $2.4 trillion, helped by an average 6% currency appreciation against the US dollar.

Heading the list of losses in country terms in 2022 is the United States, followed by Japan, China, Canada and Australia.

The largest wealth increases were recorded for Russia, Mexico, India and Brazil.

The number of USD millionaires worldwide also fell by 3.5 million during 2022 to 59.4 million. This figure does not, however, take into account 4.4 million “inflation millionaires” who would no longer qualify if the millionaire threshold were adjusted for inflation in 2022.

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But global median wealth, arguably a more meaningful indicator of how the typical person is faring, did in fact increase by 3% in 2022, in contrast to the 3.6% fall in wealth per adult.

For the world as a whole, median wealth has increased five-fold this century at roughly double the pace of wealth per adult, largely due to the rapid wealth growth in China.

THE FUTURE FOR GLOBAL WEALTH

But it’s not all doom and gloom, global wealth is expected to rise by 38% over the next five years, reaching $629 trillion by 2027, says the Global Wealth Report. Growth by middle-income countries will be the primary driver of global trends.

And wealth per adult is estimated to reach $110,270 in 2027, with the number of millionaires to reach 86 million while the number of ultra-high-net-worth individuals (UHNWIs) is likely to rise to 372,000 individuals.

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