Debunking objections to a wealth tax

wealth tax
Jose Enrique Africa

A wealth tax is based on the market value of owned assets minus debts and other liabilities, i.e., one’s net worth—anything that has monetary value. These include cash, landholdings, bank deposits, shares of stocks, vehicles, real property, pension plans, crypto funds, housing, trusts, jewelry, yachts, planes, works of art, antique collections, copyrights, etc. 

Opponents from both the government and corporate sector, however, have raised the following objections to a wealth tax: 

  • It will be harmful to the economy and hamper growth.
  • It will impede recovery from the pandemic.
  • The rich will engage in “capital flight.”
  • It will drive away investors.
  • It provides incentives for tax evasion.
  • It is a form of double taxation.
  • The returns have been insignificant. 

Harmful to economy?

From interviews with economist Jose Enrique Africa and lawyer Tony Salvador have emerged rebuttals to wealth tax faultfinders. Both agree that a wealth tax cannot be harmful to the economy and hamper growth because revenues from the new tax on the super-rich will support responses to the Covid-19 pandemic and accelerated social protection in general. 

These will lead to economic growth through direct subsidies like food, health, and transportation and other services to the poor, as well as to micro, small and medium enterprises. 

Africa adds that “experiences have shown that low taxes for the rich have not contributed at all to investments or economic growth.”  

The capital flight myth

Regarding the “capital flight” argument, Africa points out that “restricting the wealth tax to just billionaires already greatly minimizes capital flight.” In the Philippines, this reduces the number of those to be taxed from several million billionaires to just around 3,000. He doubts whether the latter will move their taxable assets abroad “because the foundations of their wealth, social circles, and economic and political networks are all in the Philippines.” 

As a safeguard, governments “can always impose an exit tax on the net wealth of Filipinos who renounce their citizenship,” he says.

Physical assets such as real property, yachts, paintings, luxury cars, etc., will not be moved as the billionaires would want to enjoy them in the country. Africa also suggests a shame campaign by “publicizing tax evasion & avoidance efforts,” thus refuting “corporate social responsibility” claims by many corporations. 

Anis Chowdhury and Jomo Sundaram doubt whether investors will stay away if a wealth tax is imposed. They argue that while tax incentives “may influence investment decisions,” these are “far from being the most important factor.” 

They say other factors, such as “political stability, legal and regulatory environments, skills and infrastructure quality”, are “more significant.” 

Tax evasion

Tony Salvador

The claim that a wealth tax will only encourage tax evasion does not hold water because assets parked abroad are still included in the computation of a billionaire’s net worth. Salvador prods governments to undertake a diligent search to account for all assets of rich individuals to “provide a disincentive for transferring assets to heirs and dummies.”

Increases in wealth due to assets rising in value—e.g., land and stock shares—will not result in income tax leakage, Salvador avers. But red flags may be raised on “inexplicable increases in cash.” One remedy is for the government to repeal the bank secrecy law, “thus facilitating the collection of income tax as well,” he says.

Salvador argues that a wealth tax cannot be seen as double taxation as it is the net wealth that is taxed, “not income that is already taxed, without prejudice to paying for taxes that have not yet been paid.” 

International agreements

Currently, there are three international mechanisms to counter tax evasion and capital flight: 

  • The “exchange of tax information” under a 2014 Multilateral Competent Authority Agreement designates which institution in each country is responsible for transferring tax data to other member-states. Tax lawyer David Wolf reports that, from 2013 to 2014, the 65-member agreement resulted in the declaration of “more than $37 billion in income and wealth hidden from tax authorities,” thus diminishing “the world of tax havens and stashing money away in secret bank accounts.”
  • The Organization for Economic Cooperation and Development drew up the framework on “domestic tax base erosion and profit sharing” (BEPS). This consists of global inter-country institutional agreements and mechanisms to counteract “tax strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.”

    The BEPS has 135 signatory-countries, but economist Manuel Montes sees it as inadequate because it excludes financial and mining companies. It should also cover domestic firms on top of transnational corporations to make it more effective in implementing progressive taxation. 
  • The June 2021 agreement among G7 countries encourages countries to: (a) impose a minimum corporate tax rate of 15%, and (b) share the excess profits of the 100 largest companies with the countries in which they operate. The aim is to prevent giant corporations from moving their profits to tax havens by setting up “shell companies.” 

    Oxfam, however, sees the 15% minimum tax as “far too low,” saying “it’s absurd for the G7 to claim it is ‘overhauling’ a broken global tax system” when their recommended minimum rate is just “similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore.” 

    As an additional safeguard mechanism, the Independent Commission for the Reform of International Corporate Taxation, urged the creation of a global asset registry “to link all types of assets, companies, and other legal structures to the beneficial owner, the person who really owns them, and not to the legal owner.”

‘Insignificant returns’ 

As for the alleged “insignificant returns” from a wealth tax, this may have been the case earlier, but the recent Argentinian initiative shows that returns can be substantial and exceed expectations. Business writer Juliana Kaplan reports that five months into its December 2020 wealth tax law, and with “worldwide critics” saying it “wasn’t feasible,” Argentina gained US$2.4 billion, with 10,000 individuals paying an amount equivalent to 0.5% of the country’s GDP. 

Thomas Pikkety

Thomas Pikkety notes that “insignificant” wealth tax returns have been due mainly to the exemptions accorded the rich, as in France which protected “business assets” and “nearly large stakes in listed and unlisted companies,” or in Italy where stocks and second homes were exempt, thus “draining much of the content from the progressive tax on capital.” All these effectively reduced the wealth tax into a form of regressive taxation. 

Despite the exemptions, Pikkety reports that “France’s wealth tax revenues were growing at a brisk pace before it was abolished in 2017.”

Citizenry’s role

The required caveats, conditionalities, safety valves and a well-constructed design can be built into a meaningful wealth tax law and its implementing rules and regulations. Ultimately, however, it is an organized, socially conscious and vigilant population that will spell the difference between the success or failure of a wealth tax policy. 

The role of civil society organizations, sectoral groups, community organizations, social movements, academics, and civic and religious groups will be important and crucial. 

This article is excerpted from Eduardo C. Tadem. 2022. “Refuting Objections to a Wealth Tax.” UP CIDS Policy Brief ( which, in turn, is extracted from a forthcoming study commissioned by the Asian Peoples’ Movement on Debt and Development. The author is professor emeritus and professorial lecturer of Asian Studies, University of the Philippines, and convenor of the UP Center for Integrative and Development Studies, Program on Alternative Development (UP CIDS AltDev). —Ed.

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