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Tax-exempt riches are not a right: economist

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An outright tax on wealth may seem out of style but two Democrats vying for the presidency in 2020, Elizabeth Warren and Bernie Sanders, say the United States should adopt one.

[BERKELEY, United States] An outright tax on wealth may seem out of style but two Democrats vying for the presidency in 2020, Elizabeth Warren and Bernie Sanders, say the United States should adopt one.

To design their plans, they sought advice from two French economists at the University of California, Berkeley, Gabriel Zucman and Emmanuel Saez, whose research on inequality shows that billionaires today pay proportionally less in income tax than the rest of America.

Mr Zucman answers AFP's questions below:

Q: When we talk about income taxes, American billionaires point to philanthropy. Is this a good way to contribute to society?

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A: Philanthropy isn't negligible but the size of such generosity is vastly overestimated in public debate. The richest 400 Americans own about US$2.5 trillion in wealth. But how much do they donate every year? About US$10 billion. So it's as if American billionaires already paid a small wealth tax of 0.4 per cent. Elizabeth Warren and Bernie Sanders would ask them to pay as much as six to eight per cent.

The second problem is the difference between giving money to a foundation and paying taxes. With a foundation, you decide how the money is spent. It isn't democratic. The rich decide what they think is a priority for the United States and the world, similar to Victorian Britain in the 19th century. In the history of Western societies, this marks one of the major declines in democracy.

Q: Could a wealth tax make the rich flee?

A: That's a simple problem to fix. American income taxes are based on nationality. You can't get out of them by fleeing to Monaco. The real risk is renunciations of US citizenship, which are rare, especially since the United States already have an "exit tax" based on unrealised capital gains.

Bernie Sanders and Elizabeth Warren are calling for an exit tax on wealth. Ms Warren's plan calls for 40 per cent. That's a strong deterrent and it makes sense. If you build a vast, US$100 billion fortune in the United States, it is in large part thanks to American infrastructure and workers educated here. And all that is financed by the US taxpayer. There's no natural right to amass a fortune but then exempt yourself from taxes.

Similar tax exits undermined Europe's wealth taxes, particularly in France. The argument that came up all the time during the abolition of the wealth tax was "it's impossible because all the great fortunes will leave for Switzerland, Belgium...." But letting them leave is a choice.

France could continue to tax wealthy French people who settle abroad or say that if you were a French resident for tax purposes for thirty to forty years, when you leave you will still pay the wealth tax for another five to 10 years.

Q: What can be done about financial arrangements for tax avoidance?

A: This, too, is a question of political will. From the 1930s to the 1980s, the United States not only had a very progressive tax system, with marginal rates of 80 per cent to 90 per cent on the highest incomes, but also the political will for this to succeed.

President (Franklin) Roosevelt spent his time explaining on the radio that it was important to pay taxes. American tax collectors had resources. Audits of high incomes were rather frequent and the financial and legal services industries - the law firms and investment funds that help wealth avoid taxation - were regulated.

All that changed in the 1980s under President (Ronald) Reagan. Social norms shifted. The tax evasion industry developed. We saw an explosion of methods for tax avoidance. For example, the rich can invest in companies that create losses to be deducted from income taxes.

At the same time, the state chose not to really fight against the boom in tax evasion, or even encouraged it in public remarks. That's the period when Donald Trump made his money.

This historical context is dated. It can change. We can certainly return to regulation and social norms in which it would be much less acceptable for wealth escape taxation.

AFP