The 499 billionaires of the EU, stalked by a tax of 2%

The application of a global tax of 2% on the assets of the 499 billionaires in the European Union would generate budgetary revenues of approximately 42.3 billion dollars (40 billion euros) for the European states, compared to the 6 billion dollars currently paid, according to a report published , yesterday, by the European Fiscal Observatory.

The principle of this tax is reminiscent of that of the 15% minimum tax on corporate profits, which is being gradually implemented worldwide after the conclusion of an international agreement under the auspices of the OECD at the end of 2021.

Joseph Stiglitz, laureate of the Nobel Prize in economics, said in the foreword of the report that these revenues "are essential for our societies (...) at a time when governments must make essential investments in education, health, infrastructure and technology ".

According to the cited document, the global minimum tax rate of 15% for multinational companies, approved in 2021, "has been considerably weakened".

The specialists of the European Fiscal Observatory say: "Initially, an increase of almost 10% was expected globally in the revenues from the tax on multinational companies, but a growing list of vulnerabilities cut the expected revenues in half. Then, tax evasion, including evasion in the gray area, is more and more common at the national level. Billionaires around the world have effective tax rates of between 0% and 0.5% of their assets due to the use of companies designed to avoid income tax. So far no one has tried to solve this problem, which represents a risk regarding the social acceptability of the existing tax systems. (...) One of the main reasons why billionaires tend to have low tax rates is that in many countries (with some exceptions) they can use personal asset holding companies (otherwise known as family holding companies) to avoid income tax . In these countries, the use of a holding company allows the avoidance of dividend taxation for wealthy owners of publicly traded companies that distribute dividends. These holding companies are located in a gray area between tax optimization, tax evasion and tax fraud. To the extent that they are created for the purpose of avoiding income tax, they can legitimately be considered part of tax evasion or evasion."

That is why the experts of the European Fiscal Observatory claim that it is necessary to introduce a global minimum tax of 2% of billionaires' assets. According to the first estimate of the revenue potential of this measure contained in the cited source, this tax would generate approximately 250 billion dollars globally, an amount that would be paid by 2,756 billionaires around the world. If there were a consolidated global minimum tax on multinational companies, applicable without any exceptions, this tax would generate revenues of another 250 billion dollars per year, the experts state in the quoted document.

They argue that the amount of 500 billion dollars would represent the need of public revenues of developing countries to face the challenges of climate change.

The specialists of the European Fiscal Observatory say: "The number of taxpayers affected by our proposal is very low, and the tax rate for these taxpayers (2%) would remain very modest, compared to the 7% increase per year, since 1995, in the incomes of billionaires to the world, an increase that is calculated only based on the adjustment of the inflation rate. Despite this, the potential for income is high due to the concentration of wealth at the top of the pyramid and the current very low tax rates for billionaires."

• 1000 billion dollars - the amount of profits relocated to tax havens in 2022

The report published by the European Fiscal Observatory also shows that a large amount of profits continue to be relocated to tax havens, with profits relocated during the year 2022 totaling 1 trillion (1,000 billion) dollars, an amount equivalent to 35% of all profits recorded by companies multinationals outside their country of origin. According to the cited document, the total financial assets held in offshore havens by individuals and multinational companies amounted to 12 trillion (12,000 billion) dollars at the end of last year.

The experts of the European Fiscal Observatory mention: "The tax revenue losses caused by this transfer are significant, equivalent to almost 10% of the income from the profit tax collected at the global level. Multinational companies based in the US are responsible for approximately 40% of global profit shifting, and European countries are among the most affected by the loss of this tax revenue."

We remember that two years ago, more than 140 countries and autonomous territories agreed to implement a minimum tax of 15% on multinational profits. However, since the 2021 political agreement on a global minimum tax rate, the provisions have been significantly weakened due to a growing list of exceptions.

The cited report states: "Currently, the global minimum tax rate would generate only a fraction of the tax revenues expected after the 2021 agreement: it is less than 5% of corporate tax revenues worldwide, compared to 9% with a rate of 15% and no exceptions, and above 16% with a tax rate of 20%. Even more worryingly, the global minimum tax rate always allows for a race to the bottom when it comes to corporate taxes (and might even strengthen it), as it allows companies to maintain effective tax rates below 15% as long as they have enough real activity in low tax countries. This exemption represents a derogation of economic substance, as it encourages multinational companies to relocate their production capacities to very low tax states, leading to the stimulation of tax havens, which will continue to offer tax rates below 15%".

• Six recommendations for balancing the tax system

That is why the experts of the European Fiscal Observatory formulated six recommendations to reduce the tax deficit of multinational corporations and the very rich. According to the cited source, fiscal deficits represent the difference between what these actors pay in taxes today and what they would pay if they paid minimal taxes that were correctly applied.

The recommendations of the specialists of the European Fiscal Observatory are:

- amending the 2021 agreement on the global minimum tax for multinational companies by setting the rate at 25% instead of 15% and by removing loopholes in the system that encourage tax competition

- establishing a new global minimum tax for the world's billionaires, equivalent to 2% of their assets

- establishing mechanisms for the taxation of large assets for natural persons who have been long-term residents in a country, but who choose to settle in a tax haven

- the implementation of unilateral measures to collect part of the fiscal deficits of multinational corporations and billionaires in the event of the failure of global agreements on them

- creation of a global register of assets for a more effective fight against tax evasion

- strengthening the application of economic substance rules and anti-abuse rules.

However, the report notes that thanks to the automatic exchange of bank information, offshore tax evasion has fallen by a third over the past decade. Thus, the cited document shows that, if before 2013 households held the equivalent of 10% of global GDP in financial wealth in tax havens around the world, in conditions where the majority of wealth was not declared to the tax authorities and belonged to individuals with high incomes, today the offshore financial assets of households still represent the equivalent of 10% of global GDP, but only in the scenario where only about 25% of this wealth escapes taxation.

The said text also says that despite this progress, some assets still escape taxation due to two main problems. The first is the possibility of holding financial assets that escape the taxation provided for in interbank exchanges, either because of non-compliance with the rules by offshore financial institutions or because of limitations in the design of the automatic exchange of banking information. The specialists of the European Fiscal Observatory also point out: "Secondly, not all assets are covered by the automatic exchange of bank information. Recent research highlights how some people who used to hide financial assets in offshore banks have exploited these loopholes by transferring their holdings to uncovered assets, particularly real estate."

They state that new forms of aggressive tax competition have emerged that severely affect public revenues. According to the cited source, over the past 15 years, many states have introduced preferential tax regimes to attract certain socio-economic groups perceived as particularly mobile.

"From a strictly national point of view, this strategy can strengthen tax collection and stimulate activity, but at the global level these policies have an overall negative impact: taxpayers attracted by one country reduce the tax base of the equivalent amount in another country, resulting in a decrease in tax collection worldwide", the quoted report states.

As these special schemes mainly target wealthy individuals, they reduce the progressivity of tax systems, thus fueling inequalities. Taxes saved per beneficiary are high, as are the fiscal costs for governments, conclude the experts of the European Fiscal Observatory.