A billionaire tax would raise $380 billion a year and make our tax systems fairer, report says
Gabriel Zucman says billionaires use tax avoidance strategies that aren't available to the majority of people. (Supplied: WEF)
If the world's 3,000 billionaires had to pay a minimum amount of tax each year, equal to 2 per cent of their wealth, global tax revenues would be up to $US250 billion ($380 billion) higher, a new report says.
It would correct a structural failure of modern tax systems, in which the 0.0001 per cent wealthiest individuals enjoy much lower effective tax rates than other social groups.
"The tax rate of billionaires would become no lower than that of middle-class workers," the report says.
Gabriel Zucman, the report's author, says it is now technically possible to implement a coordinated global minimum tax on ultra-high-net-worth individuals.
He says, similarly to the historic minimum tax on multinational corporations adopted in 2021, the minimum tax would only have to be paid by billionaires who do not already pay the equivalent of 2 per cent of their wealth in income tax.
As such, the proposal is not a wealth tax but would function as a top-up mechanism.
"To make ultra-high-net-worth individuals pay their fair share of taxes is not just the fair thing to do," Professor Zucman said.
"It is the smart thing to do if we want to protect our democracies and give governments the resources needed to provide good public services — health, education, social security — and tackle the emergencies of our time — first of all, the climate crisis," he said.
Between 1987 and 2024, the average wealth of the world's billionaire households increased by about 7 per cent a year on average, net of inflation, which is much faster than the average wealth per adult of 3 per cent a year, according to the report.
In 1987, the wealth of the global top 0.0001 per cent of households was worth 3 per cent of world GDP, but now it exceeds 13 per cent.
See the graphic below.
"Billionaires and the businesses they own have been major beneficiaries of globalisation," the report says.
"This raises the question of whether contemporary tax systems manage to distribute these gains effectively, or instead contribute to concentrating them into a few hands.
"Most of the rise of billionaires' wealth relative to world GDP owes to a rise in the concentration of wealth itself," it says.
Our tax systems rely too heavily on income tax
Professor Zucman is one of the world's top experts on the accumulation, distribution, and taxation of global income and wealth.
He is professor of economics at the Paris School of Economics and the founding director of the EU Tax Observatory.
His report, A blueprint for a coordinated minimum effective taxation standard for ultra-high-net-worth individuals, explains why billionaires have such low effective tax rates.
It says much of the problem has to do with the fact that contemporary tax systems rely so heavily on taxing income, but billionaires structure their tax affairs to avoid paying income tax.
"Billionaires are very few," the report says.
"But they have significant economic and political power through their ownership stakes in large corporations, and in some cases the ownership of media companies and influence on policymaking."
The report says that, in principle, individual income tax systems should be progressive, meaning the more income you earn, the more tax you pay.
But ultra-high-net-worth individuals derive their income not from the wages they earn, but from the wealth they own — or, more precisely, in most cases from the businesses they own. These businesses make profits, which are typically subject to corporate income tax.
The report says the "core limitation" of individual income tax is that wealthy individuals can structure their wealth to report little to no taxable income, and thus avoid paying it. It's a luxury the vast majority of people don't have.
The tax avoidance is done in two main ways:
- By avoiding dividend distribution and capital gains realisations, and;
- By using holding companies and similar legal structures.
It says ultra-high-net-worth individuals make use of these strategies to enjoy much lower effective rates of tax than all other social groups.
(See bottom section for more details on those strategies).
The proposal for a coordinated minimum taxation standard
Professor Zucman says the proposed minimum tax would be a "presumptive income tax".
That means that when a billionaire reports little taxable income — and as a result, pays little income tax — they would be presumed to earn economic income that isn't being captured by the tax code.
It would apply to individuals with more than $US1 billion in total wealth — including assets, real estate, equities, and participation in companies' ownership, among other things.
Billionaires (about 3,000 taxpayers today) should be required to pay at least 2 per cent of their wealth in individual taxes each year.
"A minimum tax is the most powerful tool to improve the effectiveness of the taxation of ultra-high-net-worth individuals, because it ensures that no matter the avoidance strategies these taxpayers may use, the amount of tax effectively paid cannot fall below a certain amount," the report says.
It says the minimum tax should not be seen as a wealth tax, but as a tool to strengthen income tax systems.
"A billionaire who already pays the equivalent of 2 per cent of their wealth in income tax (eg because that person realises a significant amount of capital gains or earns a significant amount of dividend income directly) would have no extra tax to pay," the report says.
"Only billionaires who currently pay less than 2 per cent of their wealth in tax would have to pay more. Their individual income tax payments would be topped up to reach 2 per cent of wealth.
"This mechanism differs from a wealth tax of 2 per cent for billionaires.
"A wealth tax would come in addition to any individual income tax paid, while the minimum tax proposed here would merely offset the failure of the income tax, when it fails."
How much would it raise?
The main scenario considered in the report — a 2 per cent minimum tax on global billionaires — suggests the tax would generate an estimated $US200-$US250 billion in tax revenue annually, according to the available data.
"If perfectly enforced, [it] would increase their individual tax payments by the equivalent of 1.7 per cent of their wealth," the report says.
However, the report estimates the revenue projections for a number of scenarios, including: a minimum tax rate of 1 per cent, 2 per cent, and 3 per cent, applied to billionaires and centimillionaires (those whose wealth amounts to $US100 million or more).
See the table below.
Professor Zucman said the world was in a better position to successfully implement such a proposal than it was in the past.
"Over the last 15 years, bank secrecy has been curtailed through increased information exchange between countries," he said.
"As a result, the Global Tax Evasion Report 2024 estimates that offshore tax evasion has declined by a factor of about three in less than 10 years.
"Also, in 2021, after years of deliberations, over 130 jurisdictions adopted a 15 per cent minimum tax on multinational corporations, showing that tax competition is not a law of nature," he said.
"What we have collectively done with multinational corporations, we could in principle now do with billionaires."
Australia was one of those countries to adopt the 15 per cent minimum tax on multinationals.
Where did the report originate?
In February, the Group of 20, under the presidency of Brazil, convened a meeting of finance ministers to discuss the ineffective taxation of ultra-high-net-worth individuals.
Professor Zucman was invited to address the gathering.
In his speech (here), he outlined how a coordinated minimum taxation standard on billionaires could make the taxation of the ultra-wealthy more effective.
Following his address, the Brazilian presidency then commissioned him to produce a report exploring policy options to make the taxation of high-net-worth individuals more effective.
That report will now inform the next G20 finance ministers and central bank governors meeting in Rio de Janeiro on July 25 and 26.
Brazil's Minister of Finance, Fernando Haddad, says it is essential to guarantee that everyone pays their fair share of tax.
"The Brazilian G20 presidency has put international taxation cooperation at the top of the G20 Finance Track agenda," he said.
"We are advocating the idea that a few thousand people can finance actions that will positively affect billions of humans.
"This is a very fair proposal from a social, economic, and political standpoint, greatly benefiting from world-class analytical research such as this report presented by Gabriel Zucman," he said.
First method: avoidance of dividends and capital gains realisation
The report says billionaire tax avoidance is achieved in two main ways.
The first method involves people with controlling stakes in corporations instructing those companies to avoid distributing dividends.
The report says some of the largest publicly listed companies on the planet (partly owned by some of the wealthiest people in the world) do not pay out dividends, such as Amazon and Tesla, and many others have very low payout rates, such as Alphabet and Meta. The dividend distribution policies of privately held companies typically aren't publicly disclosed.
It says when no dividend is paid out, profit is reinvested in the corporation. That reinvestment helps to increase the value of the company, boosting its share price.
When shareholders sell their shares, they realise capital gains, which in many countries are subject to individual income taxation.
However, by holding onto one's shares, that tax on capital gains can also be avoided.
"Thus, by avoiding dividend distributions and capital gains realisations, people with controlling stakes in corporations … can avoid reporting any taxable income," the report says.
"When a firm's profit is not distributed, this is income saved and reinvested in that firm, adding to the wealth of its owners.
"Ultra-high-net-worth individuals can also consume that income, eg by borrowing money (for instance by pledging shares in their firms as collateral) and using the tax-free proceeds of such loans to buy goods and services.
"The proceeds of these loans can also be used to invest in other assets, such as shares in other companies.
"In sum, even when billionaires avoid reporting any taxable income, they can use their economic income to save, to diversify their wealth, or to consume," the report says.
The report says billionaires aren't the only ones to benefit from that form of tax avoidance. In principle, less wealthy individuals can also invest in non-dividend-paying companies and avoid realising capital gains.
But what makes the situation of billionaires distinctive is that they can shield "virtually all" of their income from income tax, because for them, virtually all income derives from their ownership of businesses.
"As one moves down the income distribution, a growing fraction of income derives from wages, pension income, and other income sources which cannot avoid individual income tax," the report says.
Second method: use of holding companies
The second method involves billionaires using personal wealth-holding companies and similar legal structures to avoid paying tax.
"These holdings serve as nominal owners of shares in a corporation," the report says.
"Dividends paid by that corporation are formally received by another company (the holding) and as such, free of the individual income tax. Dividends received by holdings are also free of the corporate tax in most countries," it says.
"These dividends … constitute economic income that can be used by the persons who control the holdings to save, to diversify their wealth, or to consume," it says.
The report says in European countries where anti-abuse rules are weak, studies suggest the use of holding companies is widespread among ultra-high-net-worth individuals. These holdings allow owners of large stakes in dividend-paying companies to avoid dividend taxation.
"As a result, in these countries, effective income tax rates converge to nearly zero at the top of the wealth distribution," it says.