The billionaires’ tax

0:05Pushkin. The G20 group, which represents the world's largest economies, is discussing a billionaire's tax for the first time. Today on the show, why are the very, very rich so very, very rich? Is it a problem? And what should we do about it? This is Unhedged, the finance and markets podcast from the FT in Pushkin. I am Rob Armstrong, coming to you from Unhedged World headquarters in New York. Coming down the phone line to us from his lair in London is the FT own intellectual Robin Hood, Scourge of the Billionaires, our European economics commentator and author of the free lunch newsletter, Martin Sanbu.

1:00Martin, thank you for coming on the show. Thanks for having me. Never been introduced that way before, but I'm happy to hear it. You recently wrote a piece on the billionaire's tax that got a lot of action on the FT's website. What, if anything, did you hear from readers? This was one of my most read and most commented on pieces in a long time. And I do write quite regularly about wealth taxation and measures to combat tax dodging and so on. And the more I write, the more I actually get in touch with very, very rich people who are basically saying, go on, tax me more. You know, don't believe the propaganda.

1:38You can tax me more and I'll happily pay it. So those people are out there. They're just not as vocal as those who say different things. Before we get to this new billionaire's tax proposal, do we have a working economic theory of why there is so much wealth concentrated at the very, very tip of the wealth pyramid and why that concentration seems to be rising? I think we have several working theories. I'll try to very quickly rattle off three. Yes. The first is, you remember Thomas Piketty? Yes. Capital in the 21st century. Everyone remembers Piketty, R greater than G. The return on capital is higher than economic growth.

2:18So if you have capital, it will grow faster than incomes for everybody else. It's kind of arithmetic if R is greater than G. That's one theory. Another theory is that, you know, things have changed in policy terms. Basically, the whole transformation in economic policymaking that happened from the 1970s to the 1980s. Some people call it neoliberalism. I don't like that word. But basically, the withdrawal of the state in terms of redistribution. You know, it had a lot of aspects. It was partly simply changes in tax system, less taxes on capital, in particular, lower taxes or an attempt at lower taxes at the top end in general, but also deregulatory policies that allowed for more accumulation.

3:01So all of that has contributed to a smaller share of the economy going to wage incomes, a larger share going to capital incomes, and the accumulation of big fortunes. But I think a third working theory, that's a good term, the technology has changed. Our economies are now very different economies from 50 years ago, less manufacturing based, more service based, more globalized. Many of these changes in, you know, what are the driving sectors in the economy have made for a more winner takes all kind of structure. So it's just the economy we live in lends itself to whoever gets up on top getting much a much larger share of the cake than before.

3:42So I think those are all three reasons that work at the same time. When you give that description, Martin, the shadow of John Rawls falls over our conversation. John Rawls is the American political philosopher. one of his most famous arguments is that the just society is happy to tolerate high levels of inequality so long as those high levels of inequality, as it were, make the pie for everyone larger. They are consistent with wealth, especially at the bottom of the wealth pyramid, rising. So why are we worried about all this inequality? Rawls would say it's fine as long as everybody is getting enough to eat and so forth.

4:23Yeah. And if the poorest ones are as well off as they could possibly be, right? Yes. I think when you see the worries about inequality, they get particularly strong when that promise fails, not in a sort of static sense, but in a dynamic sense. So when suddenly things are bad and there are costs to be paid, I'm thinking here post-global financial crisis, austerity years, about 10 years ago, suddenly ordinary people feel things are really bad. Inflation is eating away at my wages or I'm losing my job. I'm suffering and governments have to put up taxes. Why am I having to pay more or be left with less than I did five or ten years ago?

5:02Or it feels that way when the people at the top are living lives of luxury. So I think that's really important. And you see, if you look back ten years, that's when all this pressure started for reforming corporate taxation. and profit taxes have been reformed, right? They've now removed a lot of the international loopholes that allowed multinational corporations to get away without paying much profit tax. Now we have a new phase after COVID, the energy crisis with Putin's war on Ukraine and so on. And again, I think you see that a lot of people are hurting and they're asking quite legitimately, I think, well, why are we the ones who have to hurt the most to pay?

5:39You tell us we have to spend more on defense or more on infrastructure or defeating global warming, whatever. But what about those guys at the top? They should be contributing much, much more. I think that's kind of the dynamic. Got it. And so what is the G20 proposal look like? So there's not a G20 proposal. There's been a discussion for the very first time in this forum that includes the biggest rich and poor big economies. So emerging economies, the big ones like China and so on, and the advanced economies. For the first time, the host, which is Brazil at the moment, the presidency of this group, asked to discuss the taxation of very rich individuals.

6:19So in a sense, this is the next phase. We've almost fixed the problem of loopholes for corporations. We're not quite there yet. We're getting there. And we're moving to the next stage. Well, what about very, very rich individuals, billionaires? They also have loopholes. We've all heard this anecdote about Warren Buffett paying less tax than his secretary, right? So think of it as the Buffett challenge. For the first time in this forum of finance ministers and leaders of the 20 most important economies, there has now been a discussion. There is a proposal that's been made by the French economist Gabriel Zucman, who is a scourge of rich people and tax dodgers everywhere.

7:02So there is a concrete proposal at the table. It's not a G20 proposal, but it's now being considered by the G20. And ministers from quite important countries have pronounced themselves in favor of it. How would this idea work just in broad outlines? The idea is look at everyone in the world who has more than a billion dollars or euros, it's roughly the same, in net worth. That's 3 ,000, 4 ,000 individuals, the very richest people in the world. They are supposed to pay income taxes, but because of the nature of capital wealth, financial wealth, it's quite easy to structure it in such a way that your income tax in the country where you reside doesn't really hit you.

7:44You never need to take out a salary, for example, right? You can take out a loan from your company, for example. So in effect, they pay quite low income taxes. The idea, Zuckman's idea is to say, well, you know, let's posit that at least 2 % of their wealth is the sort of income tax they should be paying. If they've found loopholes to get around that and pay less than 2%, then let's top it up until we get to 2 % of their net worth. If they are already paying income taxes in that amount, they don't have to pay anything extra. That's great. They've paid their fair share. But it's a sort of in-between hybrid between wealth and income.

8:22Assess the wealth, take 2 % of that, and top up to that level if the actually paid income taxes are lower than that. That's the idea. The idea is to apply that globally so that you can't avoid it by shifting your residence to your house in Switzerland or wherever, right? How do we measure the wealth of the extremely rich? It seems to me there must be a lot of clever people out there who are designing economic structures that make it unclear whose wealth is whose. You're touching on two separate problems here, right? How do you identify who the owner is? And second, how much is it? how do you actually assess the value?

9:01I don't think we should overthink this. Of course, in practice, we need to have some, you know, good technocratic solutions in place. But I don't think the wealthy themselves are in any doubt about what they own. Most, you know, most large fortunes, you know, there are some super yachts and art and so on. But most great financial wealth is financial, right? It's held in company structures, or perhaps in trusts that then hold company structures. These people keep control of their wealth, right? So in some registry somewhere, something will be traced back to some individual. Now, we have a very intransparent system, but that's a political choice.

9:41That's something we can design differently. Any publicly listed company, of course, it's easy to find out who owns it. Unlisted companies, family companies, and so on. These are all legal structures. A company isn't a natural thing that's born out of a womb, it's something that's incorporated in a jurisdiction. So you follow the paper trail. There's some work that needs to be done, but the paper trail is there. Otherwise, the company wouldn't exist, right? So most wealth, most great wealth is in that form. Some is in property. Property we can, you know, that's physically there, that can be identified.

10:16So I don't think this is an issue at all. It takes some work, but it's work that can be done. And there are countries that do have wealth taxes. Switzerland does. Norway does. About 10, 12 European countries used to have them. So it's difficult, but it's a matter of political will, really. Then there's the issue of how do you measure wealth? And again, not all wealth is easily valued, but property we already value for tax purposes. Listed shares and listed securities, they have a market value. Other objects of value you can assess based on cash flow and that sort of, you know, how much money does it actually generate?

10:55Valuable objects are insured, they will have an insurance value, you can require insurance company to report insured values of valuable objects. All of this is doable, you just have to do it. You mentioned jurisdictions and states, I think that's a very important point. The history of in particular, smaller jurisdictions that make it their business to be defectors out of the global tax regime or tax game is long. What stops certain jurisdictions from cheating on the kind of system that you describe from the Bermudas to the Monaco's to the Cayman Islands, and the list goes on? Well, what stops them is the main economies where economic value is actually generated from letting them do so.

11:44These countries have been allowed to do so because the bigger countries have been unwilling to crack down on it. It's actually very salutary that we are getting to the end of this reform of corporate taxation because it shows that actually, if you want to do it, you just sit down and do it. And now it doesn't help if a corporation is incorporated in a tax haven. The countries where they do business will be allowed to tax them anyway. And you can do the same thing with the taxation of individuals. Of course, it might be possible for an individual to hole up on a tropical island and just stay there.

12:19Most people actually want to live in the big cities, the metropolises of the world or in the country of their birth or where their family is. The US demonstrates that you can tax based on citizenship. Anyway, so again, there are lots of solutions if you have the political will. It's very striking that a lot of the changes in corporate taxation that you describe came into law in the United States under Donald Trump, a man who is not exactly an enemy of capitalism. I think it's very striking. Let's be clear at one point, it's not come into law completely yet. There's still work to do for the US to ratify all the multilateral parts of this.

12:59But what is correct is that what politically drove this, a big part of it was actually a collaboration between France and the US on Trump's watch. The two finance ministers, Bruno Le Maire on the French side and Mnuchin on the US side, they actually worked quite hard together to get some sort of compromise. It is paradoxical, but like many paradoxes, once you kind of look at what happened, it starts to make sense. In the second half of the last decade, a number of European countries were getting pretty annoyed that the big tech giants from the US were doing a lot of business in their countries, but not being headquartered there, not being registered there, didn't really have to pay much corporate tax there.

13:39They were all in Ireland, enjoying the sunshine. They were all in Ireland, so they didn't pay much tax in the US either. In fact, under Irish law, they were not Irish. So under Irish law, they were stateless. And under every other country's law, they were Irish. That was at least one of the absurd situations we were in. The reaction, again, after the austerity of the early 2010s, there was clear pressure on European politicians to make corporations pay their fair share, pay something. There were all these news stories about multinational corporations having huge business revenue but very little taxes paid in individual countries.

14:17What happened was that a number of countries started introducing digital services taxes. These were turnover taxes on internet services, basically. So they were obviously designed to hit some of these U.S. giants. It's not a great type of tax, but it was something that could be done within the existing system of bilateral tax treaties. Because corporate tax was defined, the base was allocated in these bilateral treaties, but a turnover tax you could impose. So France started doing this, the U.K. started looking at it, Italy. And I think one thing the Trump administration saw was that, you know, we're not taxing these people, but we can't anymore say, well, these are our companies to refrain from taxing when other countries actually found a way to tax them.

14:59So it became in their interest to remove some of the absurdities in U.S. tax law and start saying, well, OK, you know, we're going to start taxing them, too, then. But let's find some sort of system where this doesn't end up with double taxation, taxation on all sides. That was a big part of it. Let's talk about the practicalities here. We have a discussion at the G20. We have a notable change in the political environment. We have a promising start with corporate taxes. What's the checklist of things that need to happen if we are to tax the global super rich? The first thing that has to happen is that at national level in enough countries, there has to be a pretty strong sense that, yeah, this is something that would benefit us.

15:48And I think that will happen for two reasons. One is the needs are just becoming so overwhelming. Everybody realizes they need to invest more in infrastructure. They need to invest more in defense. Populations are aging. Public services are struggling. you know, everywhere the pressures on the public sector are getting greater. Nobody particularly wants to go to the electorate and say, hey, vote for me, I'll tax you. It's much easier to say, vote for me, I'll tax Warren Buffett and the other 3 ,000 super rich, especially those in other countries. So that's a process where once it starts, you can see how the logic almost works by itself.

16:28But I think that's the first step. And, you know, it's not insignificant money. Zuckman and his collaborators estimate that this kind of tax, which again, it would only affect people with more than a billion dollars in net worth, that would bring in some two, three hundred billion dollars a year collectively. That's enough money to make a difference to the kind of collective budget. The second thing that has to happen then is at the multilateral level, the G20 or even the G7 of rich countries and inside the EU and so on, that there would have to be some sort of common understanding that we can work on this in the way we worked on corporate taxes to come to some sort of understanding where we do all the hard work to agree how we should divide up this money.

17:17If we agree it should be done, then the much harder thing is, well, who gets how much, right? Who gets to tax who's billionaires? Is it citizenship? Is it residence? Is it where they were born? Is it where they have spent 40 years of their life before they retired in some sunny place. These are hard questions. And this is where the zero-sum game comes in, right? So you've agreed they'll all be taxed 2%. Then you divide that up. And that's a zero-sum game. That's much harder. But it happened almost. We're not quite there, but it's basically happened on corporate taxes. So one thing that could be said 10 years ago, namely that this is impossible, unrealistic, not worth putting in the political energy.

17:57We've proved that that's not true, right? It is possible. I actually think the bigger question is, will it stop there? You know, if you've managed to get to this system and tax everyone over a billion dollars, I mean, are you really then going to spare the people who only have a few hundred million in net worth? If there should be any billionaires listening to the show, please send Martin and I your comments and criticisms to robert.armstrong at ft.com. Rob, I'm sure that among your listeners are some of the most financially successful people in the world. So I'll just greet them and tell them that you can run, but you can't hide.

18:34On that thought, we're going to take a break and then we'll be back with Long and Short.

18:50Welcome back. This is Long Short, that portion of the show where we go long things we like, and we go short things that we do not like. Martin, do you have a long or a short for us? I do have a long, I'm long, liberal democracy. I mean, I think we've all worried about the big threats to liberal democracy. We're on the back foot. There are wars, China rising and so on. I actually think in the long term, liberal democracies are a lot stronger than they give themselves credit for. I love that. I love that long. And I strongly join you in it. I think there's resilience there that is met by fragility on the part of the autocracies and dictatorships of the world.

19:32I am short the commercial real estate crisis. There was when interest rates went up so much and people started working from home, there was huge talk about how there was going to be a great conflagration around commercial real estate and banks and everything else. And as it turns out, several years later, the world has not ended in commercial real estate. It's been painful. It's going to continue to be painful for two more years. But boy, no crisis in sight. I don't think we're going to have one. I get you, Rob. I mean, I've been not so much specifically on CRE, but generally, I thought there would be a fallout of this sharp rise in interest rates, whether through that mechanism or something else.

20:19I still don't quite dare to believe that we're not going to get more economic damage from monetary tightening than we have had. But, you know, I hope I'm wrong about that. Well, listeners, you can hope to believe that we will be back in your feed on Tuesday. Martin, thank you for coming on the show. Thanks for having me. Listeners, stay sharp out there.

20:45Unhedged is produced by Jake Harper and edited by Bryant Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

21:25We'll be right back.