Calls to tax wealthy people and corporations are growing as governments struggle to come up with funds to deal with the pandemic’s economic fallout.
As the Covid-19 pandemic strains government budgets around the world, some economists are arguing that it's time to make the super-rich cough up more in taxes in order to help restore the global economy.
Lockdowns, sluggish international trade and restrictions on air travel have hit incomes, increased unemployment and slashed government revenue.
The worst affected people in the past year are those who don’t have the luxury of working remotely, such as waiters in restaurants and cleaners in hotel resorts - the service industry as a whole.
On the other hand, the wealthiest people saw a marked rise in their wealth in 2020 as their businesses prospered, or the value of their stocks went up, a study by economists Dr David Hope and Dr Julian Limberg found.
“Our research shows that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance,” said Hope, a lecturer in Political Economy at King’s College London, when the report was published in December.
Hope and Julian used a 50-year data set from 18 advanced economies, which are members of the Organisation for Economic Co-operation and Development (OECD), to show that a gradual reduction in tax has increased inequality instead of having a so-called trickle down effect.
Opponents of a wealth tax have for years insisted that the rich work even harder when they know their assets won’t be taxed. This in turn helps generate economic activity as they share their ideas, knowledge and expertise, to the larger benefit of those who are not well-off.
But Hope and Julian, who teaches Public Policy at King’s College London, said the share of income of the top 1 percent of earners in the OECD countries has actually increased since 1980.
“This trend has been most severe in the Anglo-Saxon countries. The US really stands out, with over one-fifth of pre-tax national income now going to the richest 1% of individuals,” they wrote in the report released in December.
They compared the countries that had cut wealth and inheritance tax with those that had not to see if there’s any economic gain in the move.
“Gross domestic product per capita and unemployment rates are nearly identical after five years in countries that cut taxes on the rich and in those that did not,” they said.
Their finding comes at a critical moment in the US, which “really stands out, with over one-fifth of pre-tax national income now going to the richest 1 percent of individuals.”
Three Democrat lawmakers including Senator Elizabeth Warren unveiled the Ultra-Millionaire Tax Act, which seeks a 2 percent levy on households and trusts worth between $50 million and $1 billion as well as a 3 percent tax on multi-billionaires.
If the bill goes through, it will help raise $3 trillion over a decade by taxing around 100,000 American families. The money thus raised will be used to expand health coverage, child care and other services.
The matter has become all the more pressing since the likes of Jeff Bezos, Elon Musk and Mark Zuckerberg have seen an incredible rise in their wealth since the pandemic struck last year.
The total net worth of the nation’s 651 billionaires rose from $2.95 trillion on March 18 — the rough start of the pandemic shutdowns — to $4 trillion on December 7, a leap of 36 percent, said a report by Americans for Tax Fairness (ATF) and the Institute for Policy Studies (IPS).
“At $4 trillion the total wealth of all (651) U.S. billionaires today is nearly double the $2.1 trillion in total wealth held by the bottom half of the population, or 165 million Americans.”
The proposed Ultra-Millionaire Tax legislation also wants to spend $100 billion on equipping the Internal Revenue Services, the US tax agency, with more manpower and technology to ensure that assets of the rich can be properly assessed.
One significant challenge to a wealth tax is the difficulty in determining the value of assets and real estate, according to think-tanks which oppose the idea of a tax increase.
For instance, rich people have invested in trusts or own unlisted private companies. Similarly, it's not easy to determine the market value of jewellery, art or life insurance policies.
Experts have long argued that governments need to spend more on strengthening tax auditing systems, especially as the number of consultants offering tax avoidance services far exceed those trying to stop the practice.