Could a wealth tax on the top 0.1% help solve the climate crisis?
The wealthiest ‘Top 10%’ of the world’s population are responsible for nearly half of all greenhouse gas emissions, according to the Stockholm Environment Institute [1] and a new study from IREES [2].
Even more staggering, the ‘Top 0.1%’ (roughly 5.3 million adults) are responsible for 3x more greenhouse gas emissions than the entire bottom 50% of the world’s population (2.7 billion adults), exceeding a total annual carbon footprint of 225 tonnes CO2 per capita [3].* The bottom 50% have an average carbon footprint of just 0.6 tCO2 per capita.
The ultra-wealthy have seen their fortunes continue to rise, even during the COVID-19 pandemic. A recent Oxfam report, Survival of the Richest, found that the Top 1% saw their fortunes increase collectively by nearly $28 trillion over the first two years of the pandemic, as millions of people fell into poverty [4]. And this inequality is expected to dramatically increase by 2025, according to Wealth-X:
Why is this happening? One of the main reasons is that the ultra-wealthy, especially in countries like the U.S. have the lowest effective tax rates. According to a ProPublica investigation, the average effective tax rate for four of the richest men in America was about 1% [5]! Hundreds of loopholes and offshoring strategies allow the wealthy to shelter their assets from tax collectors. In the midst of a polycrisis, this makes a clear moral case for the implementation of a global wealth tax.
I’ll review the two leading wealth tax proposals, along with a compromise proposal developed at One Earth which that could raise $680B per year.
As I reviewed in my previous post about the Paris “Finance Pact’ summit earlier in the year, a coalition of NGOs released a letter signed by over 150 economists, calling for a global wealth tax that they estimate could raise $2.5 trillion per year to finance environmental and social programs.
The $2.5T number is eye-popping. If it were possible to raise that much revenue by taxing the rich, we would generate enough capital to cover the entire clean energy transition. According to the International Energy Agency’s new net zero scenario, we need to increase spending from $1.8T today to $4.5T by 2030 [6] — a gap of just over $2.5T.
How feasible would such a tax be? The $2.5T proposal comes from a report entitled Taxing Extreme Wealth [7], developed by Oxfam, the Institute for Policy Studies, and Patriotic Millionaires with data provided by Wealth-X and Forbes covering 66 countries. The report finds that by EOY 2021, globally there were:
- 3.6 million individuals between $5-$50 million in wealth with assets totaling $75.3 trillion
- 183,000 individuals between $50 million-$1B in wealth with assets totaling $36.4 trillion
- 2,660 global billionaires with total combined assets of $13.8 trillion
An annual tax on total assets (not an income tax) broken into three brackets — 2% tax on the first group, 3% on the second, and 5% for billionaires — would raise $2.5 trillion per year. (Note: the effective tax rates are lower than what’s listed, as the first $5M in wealth would not be taxable, only amounts above the $5M threshold).
The case for an even more aggressive version of the tax is also made, based on the work of Gabriel Zucman and Emmanuel Saez, which seeks to gradually phase out the existence of billionaires [8]. In that scenario, billionaires would be taxed at 10%, generating $3.6T in annual revenues. Needless to say, this would be extraordinarily difficult to implement..
One thing we all know is that billionaires are extremely influential in politics, and even a relatively small billionaire tax, say 2%, would be fiercely opposed. Implementing a 5%-10% tax on extreme wealth tax, while totally justified, is almost impossible to imagine. Part of the challenge is that the uber rich have most of their wealth locked up in private equities, which can be difficult to liquidate in significant quantities.
An alternative, and more modest, tax scheme is proposed by French economists Thomas Piketty and Lucas Chancel, Co-Director of the World Inequality Lab (WIL) housed at the Paris School of Economics and UC Berkeley [9]. The WIL proposes a progressive tax focusing only on wealth holders above $100 million in total assets. They find:
- 62.5k individuals between $100M-$1 billion in wealth with assets totaling $15.3 trillion
- 2.6k individuals between $1B-$10 billion in wealth with assets totaling $8.3 trillion
- 155 individuals between $10B-$100 billion in wealth with assets totaling $3.2 trillion
- 11 individuals between wealth above $100 billion with assets totaling $1.4 trillion
An annual wealth tax is applied in four brackets — 1.5% tax on the first group, 2% on the second, 2.5% for the third and 3% for the centibillionaires — raising close to $295 billion per year.
This proposal would be far easier to implement. Instead of chasing after millions of people, you’re only focused on about 65,000 individuals. To be fully effective it would require a “simultaneous policy” [10], whereby most every nation would adopt the policy in unison, removing the ability for the rich to shelter their assets in tax havens. The authors admit this would be difficult to implement, and they suggest that a bilateral agreement between the U.S. and EU would capture about half of the potential, assuming only a modest amount of flight.
Given the gravity of the climate crisis, the extinction crisis, the concurrent poverty and healthcare crises, and increasing food insecurity globally, this second approach does not seem sufficient to meet the needs of a world spiraling out of control. So at One Earth (OE), we are proposing a middle path that incorporates the best features of the two approaches.
Estimating various wealth brackets and tax rates involves some really complicated statistics, but fortunately WIL offers a cool calculator to estimate wealth data by population group along with effective tax rates. To create the OE tax model, we needed a more refined understanding of the various brackets in order to estimate revenue from a gradually increasing tax rate applied as follows:
- 1.5M individuals between $10M-$100 million in wealth with assets totaling $33 trillion
- 62.5k individuals between $100M-$1 billion in wealth with assets totaling $15.3 trillion
- 2.6k individuals between $1B-$10 billion in wealth with assets totaling $8.3 trillion
- 155 individuals between $10B-$100 billion in wealth with assets totaling $3.2 trillion
Each of these are divided into 10 sub-brackets to simulate a gradual (rather than a stepped) tax rate, rising from a 1% tax for people with $10M-$20 million in wealth all the way to a 3% tax rate on centibillionaires. The upper brackets are the same as the Piketty proposal, but this proposal incorporates an additional full bracket for individuals holding $10M-$100 million in total assets:
Because the exercise was focused on a wealth tax for the Top 0.1%, we also added a half-bracket for those with $4.5M-$10 million in wealth. Why $4.5M? This actually involved some tricky math. The 4 brackets listed above only cover the wealthiest 1.6 million people (the Top 0.03%). So we had to add an additional 3.7 million people to get to the wealthiest 5.3 million — the Top 0.1% based on a global population estimate of 5.3 billion adults in 2022 [11]. The WIL calculator does not give us that much detail, so we used the wealth distribution curve developed by Credit Suisse for the Global Wealth Report [12] in order to establish the threshold for the Top 0.1% at approximately $4.5M in total assets.
When you add it all together, annual revenue from One Earth’s proposed global wealth tax would be about $680 billion per year (rising to about $700B by 2030), more than double the Piketty proposal. The lowest bracket generates $46B; the second $206B; the third $188B; the fourth $139B; the fifth $69B; and $32B from centibillionaires. This approach would certainly be more feasible to implement globally, however one wonders if the difficulty involved in chasing after an additional 3.7 million people is worth the relatively modest gain of $46B per year.
You may think this is a fantasy pursuit, but the movement for a global wealth tax has been steadily gaining steam. Almost two-thirds of Americans now think a wealth tax is a great idea [13], and in the UK that figure rises to three-quarters [14]. At the recent climate march New York City in September, “Tax the Rich” signs appeared in abundance. While a global wealth tax generating $680 billion per year won’t entirely solve the climate crisis, it would go along way in accelerating the transition to renewable energy and preparing communities most at risk from the ravages of climate change.
*Note: The World Inequality Report report finds a steady increase in the annual carbon footprint of the Top 0.1% — growing from 155 tCO2 in 1990 to 209 tCO2 in 2010 and 217 tCO2 in 2015. We project continued growth at roughly 1 tCO2/yr, arriving at an estimated carbon footprint of 225 tCO2 for 2022.
