24 July 2024. Billionaires | Geopolitics

Making the billionaire tax work // How does the US-China Great Power competition end? [#560]

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1: Making the billionaire tax work

The notion that every billionaire is a policy problem (as I wrote about on Just Two Things last year) has been moving from the edge of the public discourse towards the mainstream, and obviously it gets a push every time Elon Musk opens his mouth.

In February, Brazil used its G20 Presidency to invite the academic Gabriel Zucman to speak to G20 leaders to speak to the world’s leaders about the case for co-ordinated international taxation of what are called “ultra high net worth individuals”, and after the speech, they commissioned a report from him.

Zucman is a Professor of Economics at the Paris School of Economics and at Berkeley. Last year he also as won the American Economics Association’s John Bates Clark medal, which is awarded to an economist under 40 who has made the most significant contribution to economic thought and knowledge, for his work on the importance of tax evasion, which may say something about the direction that economics is heading in.¹

That report was published at the end of June, just before the G20’s Finance Ministers met in Rio. Here’s a summary of the headline from the media Summary (opens pdf):

In the baseline proposal, individuals with more than $1 billion in total wealth (assets, real estates, equities, participation in companies’ ownership, etc.) would be required to pay a minimum amount of tax annually, equal to 2% of their wealth. Variations to the baseline scenario are also explored.

(Source: ODG, ‘Know Your Billionaires’, 2020. Their report is here.)

For clarity, billionaires that are already paying 2% of their wealth in taxes every year won’t have to pay twice. The report argues that for a range of reasons, countries don’t tax billionaires effectively, but it also says that the time is right to start doing this.

But the headline data point here is that billionaires pay very little tax, proportionally, compared to almost all of the rest of us, as a chart in the report shows.

(Source: Gabriel Zucman, ‘A blueprint for a coordinated minimum effective taxation standard for ultra-high-net-worth individuals.’ EU Tax Observatory.)

There are six reasons for this:

• Recent progress in international tax co-operation makes it feasible to create a common international standard;

• It could be enforced successfully even if some countries didn’t sign up, using mechanisms such as “exit taxes”;

• a 2% wealth tax on billionaires would raise $200-250 billion a year from around 3,000 taxpayers—and another £100-140 billion if it included centimillionaires;

• it would address the current under-taxation of the richest people in the world;

• it would complement progressive national tax policies, and improve transparency about top-end wealth; and

• its economic impact would be minimal, given that “the current effective tax rate of billionaires [is] equivalent to 0.3% of their wealth.”

Indeed, as the report puts it,

By construction, these revenues would be collected from economic actors who are both very wealthy and undertaxed today.

But one of the issues here is that in many cases we don’t know where the money is, because it is hidden behind nominee owners and holding companies. Fortunately a lot of billionaire wealth comes

from owning shares in multinational companies, the mere inclusion of beneficial ownership information in country-by-country reports (e.g., listing individuals owning more than 1% of the stock) would allow tax authorities to capture most of their wealth, facilitating enforcement.

This would increase transparency more generally about share ownership.

Another is that billionaires would re-locate to countries that weren’t participating in the tax scheme. In practice this fear tends to be overblown, unless the countries that don’t participate are particularly nice places to live. When I wrote up the launch meeting for Luke Hildyard’s book Enough on Just Two Things in April, I quoted the LSE Academic Andy Summers, who had done qualitatively research with the ultra-rich. The money quote (literally!) from that research was

“We considered Switzerland, but it’s too boring.”

The ultra wealthy don’t tend to make decisions about where to live based on small adjustments in marginal tax rates. It’s about schools, clubs, restaurants, access to top end sports and cultural events, and so on.

The way the Zucman report proposes to deal with this is through the international tax regime. This is technical, but there are already similar mechanisms in place to enforce minimum tax rates on multinational companies that can be adapted to deal with ultra high net worth wealth individuals. The important point about these provisions is that they allow countries that are members of the scheme to tax the under-taxed profits of companies located in non-member countries. In other words, you lose tax revenues to other countries if you don’t participate. It creates a kind of “race to the top” rather than a race to the bottom.

And we are talking about about marginal rates of tax here. The report has done some sums:

Everything else equal, a well-enforced minimum tax of 2% would reduce their net-of-tax return from 7.2%... to 5.5%. Adverse incentive effects are unlikely to be significant at this level of net-of-tax return.

It’s also the case that while some billionaires are sociopathic and regard society as an imposition—you can fill in your own choice of names here, but Peter Thiel would be on my list—not all of them are. We have some proxy data on this, from Rana Foorohar’s FT Swamp Notes column this week:

In the US, 62 per cent of 800 millionaires surveyed are supportive of international action to set standards for how we tax the super-rich.

Why does the report focus on wealth rather than income? It’s harder to lie about wealth:

The key virtue of expressing the tax as a fraction of wealth is that, for ultra-high-net-worth individuals, wealth is harder to manipulate than income. The key virtue of an annual tax—as opposed to a one-off tax at the time of death—is that it... ensures that the individuals with the highest ability to pay taxes cannot postpone taxation for years or decades.

There are lots of benefits here—not least a greater contribution to public services. And correcting the current failure to tax billionaires meaningfully should help to increase social cohesion.

And this opens an interesting point about the politics of this. It represents a signal from governments—even a small one—that they are not in the pocket of the world’s financial elites. In her Swamp Notes newsletter, Rana Foorohar points out the politics of this:

[N]ot only in the US but in 16 other G20 countries surveyed, a majority of adults (68 per cent) support a policy in which wealthy people pay higher taxes as a means of funding major changes to our economy and lifestyles.

The US hasn’t yet signalled support for Zucman’s proposals. Foorohar’s conclusion is that in an election year, supporting the ‘billionaire tax’ is a way for the Democrats to

put a major line in the sand between how Democrats and Republicans, who are looking to go back to a 19th-century world of no income tax and tariffs of 100 per cent, actually deal with the super-rich.

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2: How does the US-China Great Power competition end?

At Engelsberg Ideas the RAND researcher asks a genuinely interesting geopolitics question: how will the geopolitical rivalry between the US and China come to an end? It’s such a central part of world politics at the moment, it’s easy to think it will last for ever, but it probably won’t.

In fact, he has data on how long deep national rivalries do last for:

In How Rivalries End, Karen Rasler, William Thompson, and Sumit Ganguly explain that, of all great power rivalries since 1816, only three endured for a century. On average, they lasted about 60 years. If we take the founding of the People’s Republic of China in 1949 as the starting point, the current US-China contest has already lasted longer than that.

But even if we assume the current rivalry goes back only to 2010, we’re already a quarter of the way through.

(China America flag. By Alex Microbe, via Wikipedia. Public domain.)

It’s a long and detailed piece, and maybe has more detail on current US views of China than someone who doesn’t work inside the Washington Beltway really needs to know.

But it’s possible to summarise, broadly the current view of the American foreign policy establishment:

American strategy today focuses on progressively outperforming China in a series of ongoing competitions: military, economic, technological and diplomatic. Endgames are left mostly unstated, out of a belief that too much focus on outcomes is pointless and may even be counterproductive.

The current US National Security Adviser Jake Sullivan and the Deputy Secretary of State Kurt Campbell captured what this means in practice in a 2019 article in the blue chip US foreign policy journal Foreign Affairs:

‘Rather than relying on assumptions about China’s trajectory’, they wrote, ‘American strategy should be durable whatever the future brings for the Chinese system. It should seek to achieve not a definitive end state akin to the Cold War’s ultimate conclusion but a steady state of clear-eyed coexistence on terms favorable to US interests and values.’

And this kind of talk runs right through the current US policy discourse on China:

Analysts David Santoro and Brad Glosserman have argued that ‘for now, pursuing a specific endgame with China is pointless and problematic’. American strategy should aim to ‘keep the United States in and ahead of the game, i.e., in a competitive and dominant position vis-à-vis its strategic rival’.

But this can easily become competition and the pursuit of advantage for its own sake. Mazarr references the current campaign to prevent China from accessing high technology capabilities around computing and artificial intelligence.

These were originally described as a “ ‘small yard, high fence’” approach, meaning that they were supposed to be restricted to a number of technologies with evident military applications. As with all sanctions, China developed workarounds, and so the US approach becomes more and more sweeping. Every time another hole appears in the fence, the yard gets bigger. It creates a vista of endless confrontation. And this is a high-risk strategy:

Such a vision is likely to feed the paranoias of hypernationalists on both sides and could produce a sense of fatalism that tempts one or both sides into extreme behaviour. Committing to endless confrontation also risks alienating other countries watching the rivalry from the outside.

In contrast, having a view of some kind of endgame changes the politics of this, says Mazarr. It gives more authority to those who are not hyper-nationalists, in both China and the United States. It allows Washington to present competition measures as temporary, designed to manage in a period of global transition; and it signals to allies and non-aligned countries that the US does have a vision for a more stable geopolitics.

He runs through some of the options that might allow the United States to do this, and settles on a couple of options that seem to be credible to him, discarding a couple along the way.

The couple that get discarded are “accommodation” and “regime change”. Mazarr doesn’t like regime change because one of the perspectives from history is that it can backfire:

In 1940-41, the United States succeeded in coercing Japan into a choice between abandoning its ambitions and embarking on a suicidal war – and like some other nationalist ideologues, it preferred self-immolation to surrender. More recently, Vladimir Putin has responded to escalating coercion with a nationalistic and paranoia-fuelled lashing out.

It turns out that RAND has recently done a study of how rivalries between Great Powers transition into improved relationships. As it happens that report can be downloaded here, but they ended up with a list of seven:

conquest and occupation; losing a war without being occupied; political transformation, revolution or instability; political fragmentation; acceptance of secondary or middle power status; exiting the rivalry because circumstances change; and easing out of a rivalry to better achieve national interests.

Only three of these, he says, offer a route to a US-China endgame. However:

These provide a rich array of ingredients: some form of political or leadership change in one or both sides that shifts views on the rivalry; an emerging conviction that transcending a zero-sum competition would maximise national security and power; and a growing conviction that other threats – not geopolitical, perhaps, but environmental, social, and technological – pose a greater risk than the rival.

The important point here is the one about moving beyond a zero sum view of the world. Historical analogues might be the repositioning of Britain and France’s relationship in the 19th century, or the US and Japan in the 1970s and ‘80s.

You don’t get to this from where we are today in a hurry. The rhetoric is too noisy, and actual competition is too sharp-edged. From this side of the Atlantic, it sounds like weakness rather than strength. So even starting to get there requires a different sort of approach from the United States, as Mazarr suggests:

It would argue for less rhetorical emphasis on China as an enemy, and a more explicit invitation to a potential new relationship if Beijing moderates its behaviour. ... It would urge more emphasis on creating trade space where possible and on promoting societal connections to keep the threads alive for the post-rivalry relationship. And it would call for a more explicit identification of issues on which the United States can safely invite more Chinese influence and involvement.

The lesson from the past is that sooner or later rivals come to a mutual conclusion that their interests are served by winding down the confrontation. So you might as well take that outcome seriously now.

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1. Economists didn’t used to worry too much about tax evasion, although that might be because it didn’t used to be such a big problem.