Biden's billionaire tax hits the wealthy. Can a wealth tax work?

Calls for a wealth tax on the world's richest people are gaining attention again after US President Joe Biden said he would impose a new “billionaires tax” on the country's richest people if he is re-elected in November.

As he laid out his 2025 budget proposals on Monday, Biden targeted the wealthy and reiterated his plans to impose a 25% tax on Americans whose wealth exceeds $100 million.

“No billionaire should pay a lower tax rate than a teacher, sanitation worker or nurse,” he said Thursday.

These plans, previously outlined in the president's 2024 budget, have reignited a decades-long debate over how best to account for the wealth of the world's richest people.

However, the issue has taken on new importance this year, as governments globally look for new ways to plug dwindling public finances and address wealth inequality.

Last month, global finance ministers meeting at the G20 summit in Brazil said they were exploring plans to impose a global minimum tax on the world's 3,000 billionaires to ensure the top 0.1% of billionaires pay their fair share to society.

Such ideas are even supported by some of the world's richest people. In early 2024, a growing network of so-called “national millionaires” signed an open letter to world leaders, calling for higher taxes on the wealthy. Among the 260 signatories were Disney heiress Abigail Disney and “Succession” star Brian Cox.

“It's about the wealthy contributing more to society, and the very wealthy contributing more and being proud of it,” Phil White, a retired business owner and co-signer of National Millionaires, told CNBC.

But experts are divided on the effectiveness of a wealth tax, and whether it can actually be achieved.

A wealth tax is a “broad” tax on the value of all—or most—of the assets owned by a wealthy individual or family, such as cash, property, vehicles, jewelry, and other valuable items.

Unlike income tax, which is charged on annual earnings, and capital gains tax, which is charged on profits accumulated from the sale of assets, a wealth tax is viewed as a more comprehensive means of accounting for an individual's total wealth.

Such taxes were once prominent in Europe, although their implementation has waned at the turn of the 21st century amid questions about their efficiency and a broader shift toward lower tax rates at the highest levels.

As of 2024, Switzerland, Norway and Spain are among the few countries that impose some form of wealth tax. But more countries are adopting this idea. Colombia will introduce a wealth tax in 2022, and the Scottish government is among others to promote the proposals.

According to Arun Advani, associate professor of economics at the University of Warwick, the most effective wealth tax policies are those that are targeted and specific.

“If you want a wealth tax that is really going to be effective at the high end… you usually want to start at a very high threshold,” Advani said, noting that historically abandoned policies either came in too low or allowed too many exemptions. To generate sufficient tax revenues.

But tax professionals point out that even well-designed tax policies can be difficult to implement in practice, with questions arising about which assets should be taxed and who should be responsible for assessing their value.

Indeed, the potential for behavioral shifts is one of the most important arguments against wealth taxes. Critics point to the growing risk of wealth migration among the ultra-rich, including to tax havens, which they say undermines original efforts to boost government coffers.

“We're certainly seeing people looking at other countries to see, 'If there's a wealth tax coming in, is there an advantage in moving?'” said Christine Cairns, personal tax partner at PricewaterhouseCoopers.

In 2022, when Norway increased the wealth tax on residents with assets of more than 20 million Norwegian kroner ($1.8 million), many flocked to Switzerland. Businessman Tord Kolstad was one of about 70 super-rich Norwegians to make the move in 2023.

“They are doubling these taxes from day to day. This is the reason why Norwegian business owners have to leave the country. This is a huge impact on a lot of people, and me too, and it is not sustainable in the long term.” said Kolstad, founder and CEO of Norwegian real estate group T. Kolstad Eiendom.

Researchers are divided about the risks of capital flight from the wealth tax, as some believe that cash flows abroad will be limited. But it raises other concerns about the costs of such a policy and its ability to redistribute wealth

Data indicate that the wealth tax represents only a very small proportion of total tax revenues in the countries where it has been implemented. Often, these revenues have failed to increase significantly over time.

“There is a greater cost on the IRS side, because they will definitely need to do additional assessments,” Advani said. “Another cost area that could be a concern is what you do with, for example, investment incentives.”

However, supporters say the revenue generated from a wealth tax could represent a big step in combating the wealth gap.

Global wealth inequality has risen dramatically over recent years, with the richest 1% taking two-thirds of all new wealth created since 2020, according to Oxfam. The poorest 50% of the world's population now owns only 2% of total net wealth, while the richest 10% own 76%. Of that, the richest 1% own about two-thirds.

Under Biden's proposals, a 25% tax on those with more than $100 million would raise $500 billion over 10 years to help fund benefits like child care and paid parental leave. That would raise the average tax rate on 1,000 US billionaires from 8.2% and bring it in line with the 25% paid by average American workers, according to Biden.

Even imposing a 2% tax on the world's 2,756 known billionaires could raise $250 billion annually, according to a 2023 report issued by the independent research laboratory the European Union Tax Observatory, which supports calls for a global wealth tax. A separate Oxfam report in 2023 suggested that imposing a 5% tax on the world's millionaires and billionaires could raise $1.7 trillion annually – enough to lift two billion people out of poverty.

Groups like National Millionaires say this is part of their stated goals. A 2024 National Millionaires poll found that more than half (58%) of millionaires from G20 countries support a 2% tax on wealth over $10 million. Three-quarters of participants (74%) said they support increasing taxes on the wealthy in general.

However, some wonder whether such calls could be a way for the world's wealthiest to protect against a more radical redistribution of wealth in the future.

“There are people who talk very seriously about the idea of ​​libertarianism and say that there is a limit to the total amount of wealth that people should be allowed to have and some sort of 100% tax above that level,” Advani said.