Why isn't Switzerland progressively closing its wealth gap? The question is important in the context of the intense ongoing debate from Washington to London about a wealth tax.
The coronavirus pandemic has caused government debt to soar and led to calls for substantial new levies on the rich. The argument goes that the wealthy should pay their fair share and growing inequality must be addressed.
Switzerland is supposed to offer a template. Not only does it have the highest density of millionaires in the world, it has a recurring annual wealth tax, which goes back 181 years. It consistently generates more income than the other three European countries that also have a wealth tax or some version of it. In 2017, the Swiss wealth tax contributed 3.6 per cent to the total tax takings. That’s respectable, compared to the 1.1 per cent generated by Norway’s wealth tax, the 0.55 per cent raised by Spain’s and the even lower sum brought in by Belgium’s limited wealth tax on security holdings.
And yet, the Swiss Trade Union Federation, Switzerland's largest trades union, is scathing about the country’s widening wealth gap. Its 2016 report said the wealthiest 2.1 per cent of Swiss taxpayers hold assets equal in value to the remaining 97.9 per cent. Ueli Mader, a Swiss sociologist who specialises in social and wealth inequality, recently noted that “10 per cent of Swiss heirs own three-quarters of the country’s total inherited assets”.
So is a wealth tax even worth it? After all, it exacts an administrative cost, there is a political price to pay for its imposition and it could distort behaviour in terms of rich people holding more of their wealth overseas or simply bailing out of a country. In fact, France suffered an exodus of millionaires between 2000 and 2016 and an annual fiscal shortfall of billions of euros, according to some estimates, because of its "impot sur la fortune". That wealth tax was abolished in 2017 by President Emmanuel Macron.
Even so, in the US, the world’s richest but also increasingly unequal country, the issue is rising to the top of the political agenda. Just days ago, Senator Elizabeth Warren proposed the Ultra-Millionaire Tax Act. It may be hard to pass into law but there is a chance some elements may be included in another budget bill later in the year for President Joe Biden’s planned infrastructure package. On the presidential campaign trail, Mr Biden championed a different way to Ms Warren to raise money from America’s richest. This included taxing unrealised gains on assets after death and doubling the income tax rate to 40 per cent on capital gains for taxpayers with incomes of at least $1 million. But the Biden White House has still responded encouragingly to Ms Warren’s bill. Jen Psaki, the White House press secretary, recently said that Mr Biden “strongly believes that the ultra-wealthy and corporations need to finally start paying their fair share”.
Ms Warren’s proposed legislation would do that in spades. It would exempt the first $50m of wealth for everyone, impose a two per cent annual levy on households and trusts valued at between $50m and $1 billion and slap an extra one per cent surcharge on billionaires. The senator has said the proposed wealth tax would raise at least $3 trillion over a decade, thus helping to pay for badly needed investments in America’s infrastructure, child care and health reforms. What’s more, she claims, it will create a “fairer” economy.
That argument has powerful appeal, especially because only small numbers of people – just 75,000 households – would have to pay more towards a project of national renewal. A wealth tax would also address the perception – and reality – of inter-generational inequality in America.
In 2019, data from the Federal Reserve showed that the top one per cent owned nearly one-third of all US household wealth, compared to nearly one-quarter about 30 years ago. In that timespan, the bottom 50 per cent went from owning 3.7 per cent of the wealth to just 1.9 per cent. According to the two economists who have done significant work on the issue – Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley – the top 0.1 per cent of American taxpayers accounted for about 20 per cent of wealth in 2012, up from seven per cent in 1978.
There is broad bipartisan approval among ordinary Americans for taxing the very rich. A January 2020 Reuters/Ipsos poll found nearly two-thirds of respondents – 77 per cent of Democrats and 53 per cent of Republicans – in agreement.
The sentiment is mirrored across the Atlantic. Three-quarters of the people polled by Ipsos Mori in Britain in October supported a wealth tax. Everyone said it was better than a rise in income tax, VAT, council tax or capital gains tax. The survey was conducted right before leading UK tax experts and economists issued a report on the fairness and efficiency of a one per cent levy on millionaire households. The report said a one-off tax on a person's total wealth could raise £260bn ($362bn) over five years if the threshold was set at £1m. It would affect just six per cent of Britain's adult population.
The idea of a one-off tax contrasts with the Swiss model, which has obvious problems. Switzerland’s wealth tax is relatively low, varying by canton between about 0.3 and one per cent a year of taxpayers’ total net worth. Also, foreign residents are only taxed on the portion of their fortune deemed related to their living expenses in the country. This means, as Professor Mader has pointed out, that “the Swiss tax system is very favourable” to multi-millionaires, about half of whom come from abroad. Taken together, these aspects help explain why Switzerland might be becoming less equal despite its annual wealth tax.
Finally, there are the doubts raised by some about the very idea of an annual tax on wealth. A November study from the UK’s Institute for Fiscal Studies said “the case for a one-off wealth tax is simple” but it’s harder to explain why “it is better to tax the same wealth every year – penalising those who save”. Many economists question the wisdom of taxing wealth every year it is kept, rather than taxing all sources of wealth once they are received or used. In other words, they advocate tax reform rather than the introduction of a new annual wealth tax.
Overall, it seems that one big levy is the way to go. There is precedent. In the throes of the First World War, British economist AC Pigou called for a one-time wealth tax to allow the very wealthy to share more equitably in the burden of an exceptional disaster. He saw it as analogous to a draft – necessary, painful, but sorely needed.
There is resonance today.
Rashmee Roshan Lall is a columnist for The National