How to tax the rich

Part 2 of the blog series Solutions to inequality, bringing together inspiring policy ideas and initiatives delivering greater equality from around the world. Don’t accept it when people tell you that change isn’t possible!

-- / Bradley Stearn

In case you missed it, the rich have got not just richer, but a lot richer during the pandemic. Last month, Oxfam told the world that the 10 richest people on the planet, including Jeff Bezos, Elon Musk, and Bill Gates, have seen their billions double, from $75 million to $1.5 trillion. While Oxfam’s annual numbers always cause a stir — the focus on how much richer these billionaires got during the pandemic felt particularly pointed. Elon Musk argues that these are unrealized assets — a dollar figure on the stock of wealth he has, tied up in stocks and shares — as if wealth means less than the amount of cash in your account?! In any case, millions have been pushed into poverty and are in increasingly unsustainable levels of debt, so the inequality is very real.

Where is all this extra wealth coming from? Have the richest been working twice as hard?! Obviously not. A large part of this wealth is the outcome of the monetary tools — namely quantitative easing — employed to keep economies hydrated during the pandemic, so is almost nothing to do with anything these rich men have produced in the work place. Some, like Bezos of Amazon, have seen demand for their business rise, but rich people profiting from the pandemic can seem particularly unsavory, especially when wages and conditions for staff are poor.

Of course, the easy answer is to say: “tax the rich.” And indeed, in many countries this is a popular route — as Elon Musk found out when he asked Twitter if he should sell some of his shares. Our own polling in eight countries, including Uruguay, Mexico, Costa Rica, Canada, Sweden, Sierra Leone, Tunisia, and South Korea, found that regardless of the countries, a large majority of people are bothered about wealthy people not paying their fair share. Polling in other parts of the world confirms a similar strength of feeling.

Figure 1: Global responses to “How much, if at all, does each of the following bother you about the tax system in [country]? (% of total) (Source: NYU CIC and Kantar 2021; countries: Canada, Costa Rica, Mexico, Republic of Korea, Sierra Leone, Sweden, Tunisia, Uruguay.)

Where should this money from the rich go? Our polling found that there is prevailing sentiment across countries to help those within their societies who are most in need. Seventy-nine percent of respondents expressed their preference for governments to financially support low-income families. Such support is even more pronounced among young people (83 percent versus 76 percent), those with lower level of education (87 percent versus 72 percent), and those with lower economic status (86 percent versus 74 percent) and stays consistently above 70 percent across various categories. The above tracks with NYU Center on International Cooperation’s previous research, which found that the pandemic has triggered an increase in support for social policies that go well beyond the crisis.

Given the public support, why aren’t we seeing blanket tax and redistribution programs? Well, the rich who don’t want to be taxed more, are very good at wielding their influence to prevent such things from happening. Not just through direct lobbying and “donations” to political parties, but through using lines connected to “working hard” or painting criticism as envy, and indeed making people think it could be them that will be rich one day. People have noticed the power the rich have — with almost two-thirds of respondents across the eight countries we polled either strongly agreeing or tending to agree that the government in their country is largely influenced by a few wealthy individuals, interest groups or businesses.

Another challenge is that government corruption can make people less inclined to pay taxes — of course, this is a convenient excuse for the rich, but fiscal legitimacy is a real issue in many countries around the world. Characteristics of fiscal legitimacy include transparency, accountability, responsibility, effectiveness, efficiency, fairness, and justice. Undermining any of these concepts results in a lack of societal-state trust which in turn can lead to tax noncompliance and revenue losses.

So how can we solve issues of trust, while introducing wealth taxes in countries where the rich are extremely good at shaping policy in their favor? One route is a solidarity tax or a voluntary solidarity fund. These are often short-term taxes, commonly on wealth but also sometimes on income, framed and communicated as a method by which to redistribute from the rich to those less well-off in times of crisis. They are a reminder that taxes are not just a technical issue, but an emotional one. They allow you to build bonds with not just the state and the citizen, but between citizens.

Solidarity taxes and funds have long been used to address various problems of inequality. Finland, for example, used solidarity taxes to resettle refugees who had been displaced from the Karelian Peninsula by the Soviet Union in 1940 and 1944. Japan used its one-off capital levy after the Second World War to reduce inequalities by redistributing wealth. This also promoted democratic governance by limiting the concentration of power in the hands of the elite financial mafia. More recently, solidarity funds have been used for COVID-19 recovery in Kenya, South Africa, Uruguay, and Nigeria, also aimed at supporting the most vulnerable groups.

Attiya Waris’ paper for Pathfinders reviewing solidarity taxes, finds that key to their success is clarity on how the money is going to be used, transparency on spending, and honesty about timelines. Communication is key, and this is where there is room for a solidarity tax to make broader arguments of the value of tax that then lead to the normalization of wealth taxes. It can be a bridge to humanizing and legitimizing higher taxes and greater redistribution.

As we enter the third year of the global pandemic there is perhaps no better time to make the case for solidarity and wealth taxes on the rich. As David Stasavage and Kenneth Scheve show in their book, Taxing the rich, which reviewed the historical context which provided the conditions for increasing taxes, there are key points in history, like in the aftermath of a war, in which new arguments about taxes can be made. Just as the current spotlight on rich Russian oligarchs provides us with a moment to argue for fundamental policy change in the Western-controlled tax jurisdictions that help support their money laundering and tax avoidance, we need to use public support to impose greater taxes on the rich. The trick is timing — the window will only be open for a short time.



Pathfinders for Peaceful, Just and Inclusive Societies

Inequality Program Lead at NYU’s Pathfinders & Visiting Professor in Practice at LSE’s Institute for International Inequalities (III)