A European wealth tax

A European wealth tax could be a ‘win-win’ strategy for reducing extreme wealth inequality and funding the recovery from the pandemic.

Covid-19 has swept through the European Union with a devastating socio-economic effect, leaving many member states struggling to recuperate. Moreover, major social challenges of recent decades—such as the impending climate catastrophe and rising inequality—advance, unabated.

A pan-European wealth tax could provide Europe with the resources it needs to face these headwinds, accruing substantial amounts to foster a fair and green recovery after the pandemic. Measures planned in the context of the European Green Deal are not sufficient to achieve the transformation to a carbon-neutral European economy. And the coronavirus crisis has exacerbated inequalities, within as well as between countries, which a wealth tax would help alleviate.

Indeed, if used to fund a ‘greener Europe’, such a tax would impose a significant share of the burden of the socio-ecological transformation on the richest households—the social group with the greatest ecological footprint. By being levied at European level, it would also minimise evasion and create a joint tax base, as a fiscal foundation to confront the gamut of contemporary social challenges, marking real institutional progress in the political capacities of the European Union.

Strikingly high

In the last two decades, the social-scientific community has paid increased attention to wealth inequality: observed levels are strikingly high and, in many cases, increasing. In a recent study of 22 EU countries based on data from the European Central Bank’s Household Finance and Consumption Survey, we find that the share of total wealth held by the richest 1 per cent of the population is about one third, while the bottom half of the wealth distribution owns only about 3 per cent.

Such observations give rise to general concerns about fairness, but also more specific reflections on how—indeed whether—open societies can cope with such high and increasing inequality. How can intensified social cleavages and increased instability be avoided? How can the quality of political institutions be sustained? And how can future challenges be confronted, when European tax systems to generate the resources required are only mildly redistributive?

Against this backdrop it seems obvious to explore novel forms of taxation of wealth—as advocated, for example, by Thomas Piketty or Gabriel Zucman—which can decrease inequality and increase capacity for public action at the same time. So, our recent study provides plausible estimates not only of wealth inequality in Europe but also of potential revenues from a European wealth tax.

Clear-cut advantage

One clear-cut advantage of such a tax is that it would affect only a small minority of households—about 3 per cent of the European population, assuming a more-than-reasonable exemption of the first €1 million of net wealth (total assets minus total debt), and even less with a higher threshold—yet it would eventually benefit all by helping ensure a safe, fair and sustainable future for European economies and societies.

In our report we analyse four tax scenarios. First is a flat tax (model I), of 2 per cent on household net wealth above €1 million. Second is a mildly-progressive tax (model II), starting at 1 per cent on net wealth above €1 million and ending at 3 per cent on net wealth above €5 million. Third is a strongly-progressive model (model III), starting at 2 per cent on net wealth above €2 million and ending at 10 per cent on household net wealth above €500 million.

The fourth model is highly progressive and is based on Piketty’s suggestion to impose an effective upper limit on the wealth an individual can possess. It is based on long-term scepticism about sustaining and expanding individual freedom, social stability and democratic politics if unchecked wealth accumulation comes with successive concentrations of power. This model introduces a de facto wealth cap at around €260 million, with highly progressive top rates of 60 per cent for wealth holdings beyond that level (1,000 times EU22 average wealth) and 90 per cent for wealth beyond €2.6 billion.

Revenue potential

We use ECB data to model the distribution of wealth within the 22 EU countries selected and to estimate the revenue potential of our four designs (see table). Even the flat tax would generate €192 billion (1.6 per cent of gross domestic product) in annual revenues, according to our estimates. Taxing private household wealth mildly or strongly progressively could raise €224 billion (1.9 per cent of GDP) to €357 billion (3.0 per cent of GDP). Imposing a sharply progressive tax, with an effective cap on net wealth of 1,000 times the average, would generate €1,281 billion (10.8 per cent) in its first year of implementation, stabilising at a lower level thereafter.

Tax revenue estimates for models I to IV, taking evasion effects into account

	Revenue estimate	% of GDP
Model I:  flat tax	€192 billion	1.6 per cent
Model II:  mildly progressive	€224 billion	1.9 per cent
Model III: strongly progressive	€357 billion	3.0 per cent
Model IV: wealth cap	€1,281 billion	10.8 per cent

The strong revenue potential of a European wealth tax is the flip side of high wealth inequality. Since the richest 1 per cent of all households hold almost a third of Europe’s wealth, taxing this small minority has the potential to generate large revenues—needed not only to limit the devastating impact of the pandemic but also to fund the fundamental transition to a carbon-neutral society.

There is ample evidence of the extreme concentration of wealth at the top of the distribution. Our finding of the large revenue potential especially of progressive wealth taxes is thus unsurprising. Designing such a tax along the following principles would also make it practicable:

• a co-ordinated European approach can boost enforcement and reduce evasion possibilities;
• using current instead of historic prices for asset valuations will limit perverse incentives;
• enforcement requires additional resources for Europe’s tax authorities, as well as specialised infrastructure (databases for asset valuations, automatic information exchange, beneficial-ownership registries);
• well-equipped tax authorities will be able greatly to reduce the administrative burden for taxpayers by using automatic information exchange between countries and financial institutions and issuing pre-filled tax files, and
• to stem leakage, the EU can imitate the US Foreign Account Tax Compliance Act, using its size and influence to put pressure on external jurisdictions, especially tax havens.

A European wealth tax is thus feasible as well as fair. It has the potential to generate large revenues, which can be invested in a more just and sustainable Europe.