by Giles Merritt*
The heat is on for taxes. But whether it’s the under-taxed rich who’ll get burnt or rival national tax gatherers is an open question. Efforts to shore up tax receipts across the European Union are also recipes for conflict.
“Soak the rich” is a cry that’s getting louder by the day. Wringing fairer tax contributions from the super-rich is increasingly popular because tax-dodging billionaires and giant corporations have become so absurdly wealthy.
In an unusually outspoken report, the European Commission has pointed to growing anger over “the rise of the super-rich”. It noted in 2020 that “by 2050, the top 0.1 per cent will own more wealth than the total global middle-class.”
There’s no EU strategy to tackle this. Its 27 member states jealously guard their tax-raising powers and resist moves to share any with Brussels. Although the €800 billion Covid recovery fund allowed the EU to borrow collectively on international capital markets, follow-ups have been sternly resisted.
When it comes to tax, member governments are their own worst enemies. They try to outbid their neighbours with enticements to rich investors. Instead of a common tax regime on earnings, assets, legacies and death duties, EU governments opt for beggar-thy-neighbour policies that benefit the wealthy and penalise ordinary taxpayers.
Worse, many governments in the EU and elsewhere permit or turn a blind eye to brazen loopholes and tax havens. Big companies and banks use ‘thin capitalisation’ to shift debt between subsidiaries, depriving national tax authorities of billions. When president of the European Parliament a decade ago, German socialist Martin Schulz warned that tax dodging in the EU amounts to a trillion euros yearly.
Illegal tax evasion, needless to say, is worse. The US-based consortium of journalists that sparked an international furore when it dug out secret tax records in the Panama Papers and 21 other ‘black’ havens claims that illicit money hidden from tax authorities worldwide may amount to $32 trillion – about a third of a year’s global GDP. Its rogues gallery implicated hundreds of politicians, dictators and business tycoons.
The root of the problem is that cash is highly mobile and anonymous. Capital flight – by a change of domicile or even suitcases stuffed with banknotes – is the classic response when a fiscal environment becomes more hostile. Blanket tax arrangements are the answer. The OECD’s new 15 per cent minimum corporation tax is beginning to bite, and hopefully so too will the EU’s 2021 transparency rules on multinationals’ profits and tax payments.
Tax competition nevertheless surges unabated within the EU as governments strive to attract the rich. The UK’s imminent abolition of its longstanding ‘non-dom’ tax holiday on expatriates’ foreign earnings and capital gains is provoking intense competition between Italy, Switzerland, Portugal and Greece – and of course Monaco, Andorra and Lichtenstein – for the thousands of millionaire tax refugees who will be leaving Britain.
France is particularly anxious to boost its tax revenues, but is also an object lesson in the difficulties of soaking the rich. In 1982, French president Francois Mitterrand introduced an ‘Impot sur la fortune’ targeting anyone with assets worth €10 million or more. It was soon dropped because the outflow of investment capital proved to be double the increased revenues. Thirty years later, Francois Hollande briefly imposed a similar levy, until that triggered another dramatic flight of capital.
There’s increasingly frenzied discussion of possible solutions to European countries’ fiscal difficulties. The obvious first step should be not to repeat old mistakes. Intra-European tax competition is a circular firing squad – everyone suffers. Far better to develop new ideas that won’t provoke ill feeling yet don’t allow tax-evading boardrooms and billionaires to get off scot free.
Two noteworthy ideas are circulating. The first is to tax the land beneath buildings far more heavily. The second is for governments to link the bonds they issue to GDP growth rather than interest rates. Proponents of a new land tax say it should be introduced gradually over 20 years or so, beginning with a low rate of 0.06 per cent, costing the owner of a €1 million property only €300 a year.
Taxing land would clearly fall most heavily on the wealthy. And if initially modest, it wouldn’t hit residential property values while also having the great advantage of being unavoidable. The other suggestion, that governments should issue GDP-linked bonds with a ten-year maturity, has a similarly common sense appeal. Investors would earn more as the economy grew, while treasuries would owe less in hard times. In any case, it’s high time to think out of the box on tax.
*Founder of Friends of Europe
**first published in: Friendsofeurope.org
By: N. Peter Kramer
