Will wealth taxes work? Virtual Roundtable
Context:
KPMG International hosted a roundtable discussion in July 2024 to explore the differing types of wealth taxes that are gaining attention. We asked: Will the proposed taxes work and how? What will be the potential implications? What role can they play in the tax mix alongside labor and consumption taxes?
This is the second conversation in this workstream and was hosted virtually to accommodate a mix of global voices and perspectives. The write-up from the first roundtable held in London can be found here.
The conversation was held under the Chatham House Rule (which means nothing can be attributed to attendees) and was attended by eleven expert participants (see below for a list of attendees). The write-up below summarizes the personal views of participants and does not necessarily reflect the view of any particular organization, including KPMG.
Executive summary:
While wealth taxes in the generic or widest sense have evident growing public support, defining the purpose and type of a potential wealth tax is critical and not always clear.
Proponents of wealth tax argue they can be used to address inequality, increase revenues, or start to address the democratic implications of growing wealth. Deciding on the focus of any proposal is key.
Any wealth tax needs to be considered within the overall framework of a particular tax system.
Ensuring that wealth tax revenue is allocated specifically for the intended purposes is essential in gaining public trust and support.
Defining any wealth tax is also vital, as is who has taxing rights.
There is real concern that the relocation of wealthy individuals following the introduction of a wealth tax has the potential to negatively impact investment and economic stability.
Finding robust and consistent methods to deal with the taxation of unrealized gains is crucial to avoid unintended consequences. There are valuation challenges, especially for hard-to-value assets.
While Value Added Tax (VAT) is often cited as a useful alternative to a wealth tax, it does not necessarily address wealth inequality and there is debate around its progressivity.
Setting appropriate thresholds is critical for fairness and effectiveness. Consideration of other taxes, such as income and capital gains taxes, is necessary to create a balanced tax system.
Harmonizing wealth taxes across regions and implementing a global minimum tax can prevent tax avoidance. Switzerland's conservative fiscal approach offers insights into effective wealth tax implementation.
There is widespread skepticism that a global wealth tax is feasible, even if it is desirable – but the same would have been said of a global minimum corporate tax level a decade ago.
Defining the Purpose
Reducing wealth inequality, funding public services and the green transition, diminishing lobbying power concentration and hypothecation
The various purposes for potential wealth taxes were discussed, with some unclear on a unified vision. One primary objective raised was reducing wealth inequality. It was suggested that addressing the concentration of wealth, these taxes have the potential to tackle a significant societal issue.
Participants discussed the role of potential wealth taxes in funding public services and contributing to the green transition. Wealth taxes could provide necessary revenue for enhancing public sector investment opportunities, which are crucial for both socio-economic improvement and tackling climate change.
A key democratic argument, participants pointed out, is that wealth taxes can help reduce the influence of wealthy individuals in political processes. While this alone does not solve the problem of lobbying concentration, it is a necessary step toward a fairer political system.
Additionally, participants emphasized the importance of hypothecation in wealth tax policy. Ensuring revenue from any potential wealth tax is specifically allocated to the purpose it was designed to fulfil will be crucial in ensuring public trust and support.
The Potentially Negative Implications
Mobility of the wealthy, valuation issues and unrealized capital gains, hidden wealth and VAT
Participants discussed several issues around the implementation of wealth taxes. One significant concern is the relocation and mobility of wealthy individuals. Norway was raised as an example where this has been the case. However, the correlation may not be direct. Evidence from The Wealth Tax Commission suggests that the reason for the flight had little to do with the wealth tax but rather the changes to Capital Gains Tax (CGT). Since 2006, Norway has had a CGT, which – as in the UK – applies to gains on realization. Like the UK, the tax is largely residency-based and in the case of Norway, under the old rules, if they left before 29 November 2022, there was a ‘deferred’ exit tax which expired five years after departure unless the shares had been sold in the interim. This meant that leaving Norway for five years provided a relatively easy way of avoiding CGT.
Since November 2022, however, the exit tax obligation remains indefinite, and the shareholder must pay an increased rate of CGT – currently 37.84 percent – upon the sale of shares. The Wealth Commission suggests that this change rather than the Wealth Tax was the cause of the response seen in Norway and demonstrates that pre-announcement of certain reforms can be costly when there are delays in implementation.1
Another critical implication discussed is the challenge of unrealized capital gains and valuation issues. Defining who is 'wealthy' and addressing the taxation of unrealized gains are important to avoid unintended consequences. Participants highlighted the difficulties posed by hard-to-value assets and artificial liquidity events, which complicate tax implementation. Switzerland’s approach, where taxpayers and authorities agree on valuation methodologies, was noted as a potential model.2
The issue of hidden wealth and tax avoidance was also a significant point of discussion. Participants highlighted the need for increased transparency and tools such as asset and beneficial owner registries. However, the debate remains unresolved on whether to tax based on the individual’s location or the asset’s location. Ensuring a global minimum tax level to tackle tax avoidance would be potentially necessary.
Participants also discussed the role of VAT. Though consumption taxes have been shown to be effective in both raising revenue and, with considered design, encouraging positive behavior change, debate continues about their regressivity.3 Wealth taxes, it was suggested, could complement VAT to provide a more balanced approach to taxation.
Design Considerations
Wealth taxes history as emergency tax, threshold, considering the tax mix, balancing wealth taxes against other taxes, Switzerland example, national regional or global minimum
Participants discussed the importance of understanding that wealth taxes have historically been used as emergency measures. These taxes, often introduced during crises, need careful consideration for long-term implementation. Setting appropriate thresholds is critical to ensure fairness and effectiveness.
Participants discussed the importance of balancing the tax mix. Consideration of other taxes, such as income and capital gains taxes, is necessary to create a fair and effective tax system. Switzerland’s tax system, which features low wealth tax rates and minimal other capital taxes, was cited as an example of a balanced approach.4
The debate also touched on the need for harmonizing wealth taxes at national, regional, or global levels. Participants emphasized that implementing a global minimum wealth tax could prevent tax avoidance and issues such as the mobility of the wealth, which was discussed earlier. Switzerland’s conservative fiscal approach, which prioritizes balanced budgets and fiscal discipline, offers insights into effective wealth tax implementation it was suggested.
Contributors to the conversation included:
Raúl Barroso, Author of Wealth Taxes can Backfire and Assistant professor, IÉSEG School of Management
Daniel Bunn, President & CEO, Tax Foundation
Becky Holloway, Programme Director, Jericho Chambers
Neal Lawson, Partner, Jericho Chambers
Greg Limb, Global Head of Family Office and Private Client, KPMG in the UK
Arnaud Longet, General Manager, AIT Geneva SA
Chris Morgan, Global Leader for the KPMG Responsible Tax Program, KPMG International
Chiara Putaturo, EU Policy Advisor on Tax and Inequalities, Oxfam
Gideon Skinner, Head of Politics Research, Ipsos Public Affairs
Rafael Wildauer, Associate Professor in Economics, Deputy Director, The Greenwich University‘s Institute of Political Economy, Governance, Finance and Accountability (PEGFA)
Footnotes:
Tax Journal. (2023). Wealth tax: the debate continues. Tax Journal, [online]
Advani, A. and Tarrant, H. (2023). Wealth Taxation in Switzerland: Country Case Study. [pdf] Wealth and Policy.
KPMG. (2024). What is the role of consumption taxes in building effective tax systems? Responsible Tax.
