Barriers to G20 Billionaire Tax Plan Are a Blessing in Disguise

A new proposal showcased at the G20 aims to coordinate countries to tax at least 2% of the net wealth of billionaires—and it remains open to extending that tax to centimillionaires as well. This plan would be extraordinarily difficult to administer and enforce and would struggle to pass constitutional muster in the US, especially in light of the Supreme Court’s recent Moore v. United States ruling.

The economic drawback to taxing a percentage of wealth annually is that it creates an incentive to consume resources quickly, rather than reinvest them into longer term projects.

Consider a taxpayer who wins a lottery and becomes subject to a 2% annual wealth tax for the first time. That taxpayers must choose between using a dollar on immediate consumption or investing it for five years, or 10 years. A wealth tax plan wouldn’t levy these three activities equally. Instead, it would tax them at 0%, roughly 10%, and roughly 20%, respectively.

We should generally eschew taxes that fall unequally like this, especially when they’re biased against long-term investments. Money reinvested into capital goods makes the world more productive, while money spent on consumption goods doesn’t. The reinvestment of Elon Musk’s PayPal wealth into Tesla Inc. and SpaceX was more socially beneficial than lavish personal spending would have been.

The administration and enforcement of any wealth-based tax is unusually difficult, even if authorities attempt to do so faithfully. Wealth-based taxes don’t have market transactions to measure against in the way that income-based taxes do. Authorities instead must invent rules of thumb for valuation, cobbled together from a variety of sources such as comparable assets, multiples of income generated, or multiples of balance sheet value.

Taxpayers will inevitably appeal these numbers as arbitrary and incorrect, and often be right in doing so.

Worse yet, taxpayers proactively invent complex asset types to trick authorities. In the US, residence trusts sometimes split the right to a home’s price appreciation away from the right to live in the home. Such structures often are designed to reduce effective estate tax liability.

Uneven Enforcement

Defining and evaluating wealth is difficult, even for a jurisdiction doing its best. But some jurisdictions may implement a wealth tax unfaithfully.

The theory of tax competition says small jurisdictions benefit greatly from attracting global income and assets, even if taxed at a very low rate. From the perspective of a tiny country with a tiny budget, a little bit of tax on vast global wealth (generated mostly outside the country’s borders) goes a long way. These jurisdictions will tend to offer extremely low tax rates.

Coordination among countries could solve tax competition in theory, but not in practice. Small jurisdictions may agree nominally to a minimum tax, but they’ll still have an incentive to attract global income and assets, for example, by agreeing to low valuations provided by taxpayers or creating rules that systematically undervalue classes of asset.

The proposed minimum tax is said to be inspired in part by Pillar Two’s 15% global minimum tax on corporate income. But there are already signs some jurisdictions will comply with the strict text of the Pillar Two framework more than the spirit.

Bermuda is putting together laws that would both comply with the 15% minimum but also return money to global corporations through qualified refundable tax credits. In the government’s words, the goal of this package is to “maintain Bermuda’s attractiveness.”

Put another way, Bermuda intends to continue participating in tax competition despite the Pillar Two agreement. In the same vein, small jurisdictions that pursue tax-competitive strategies would have incentive to enforce a wealth tax lightly, if at all.

The combination of administrative difficulties and tax competition have made wealth taxes relatively scarce in practice, as countries abandon them for better policy tools. Just four OECD countries have net wealth taxes today, down from a high of 12 countries three decades ago.

US Barriers

In the US, constitutional law is a significant barrier to enactment of any wealth tax. An unwieldy constitutional requirement (Article 1, Section 2) for apportionment among states by population makes many taxes unfeasible. The 16th Amendment, which permits an income tax, offers a respite from the apportionment requirement.

But an income tax isn’t the same as a wealth tax, and the recent Moore opinion suggests that the Supreme Court is skeptical that the 16th Amendment permits the taxation of unrealized gains.

Justices Amy Coney Barrett and Samuel Alito wrote that “the answer is straightforward: no.” Justices Clarence Thomas and Neil Gorsuch wrote that 16th Amendment income “refers only to income realized by the taxpayer.” Only one more justice would need to join these four to create a majority against the constitutionality of taxing unrealized gains.

Gabriel Zucman, the wealth tax proponent, argues that wealth taxes—for example, by turning a wealth figure into an implied income figure—can be designed to fall within an income tax framework, but certain counterexamples present difficulties.

Consider a wealthy founder and shareholder of a valuable company whose value declines during the year, and who doesn’t sell any of his shares. Such a shareholder would have high wealth but negative unrealized income and no realized income. It likely would be difficult to justify a tax on this shareholder in income tax terms, despite his wealth.

The substantial administrative and constitutional barriers to a wealth tax probably will keep the policy from moving beyond the proposal stage. But given the economic drawback of a wealth tax, the barriers to setting one up are a blessing in disguise.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan Cole is a senior economist at the Tax Foundation, with focus on business taxes, cross-border taxes, and macroeconomics.

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