Source: The Conversation (Au and NZ) – By Venkat Narayanan, Senior Lecturer – Accounting and Tax, RMIT University
Earlier this year, I attended a housing conference in Sydney. The event’s opening address centred on the way Australia seems to be becoming like 18th-century England – a country where inheritance largely determines one’s opportunities in life.
There has been a lot of media coverage of economic inequities in Australian society. Our tax system has been partly blamed for this problem. The case for long-term, visionary tax reform has never been stronger. And one area of tax reform could be a wealth tax.
First, let’s be clear about one thing. Unlike the superannuation tax reforms currently being debated for those with more than A$3 million in superannuation, the wealth tax we’re talking about would apply to a very different cohort: billionaires.
A recent article in the Financial Times re-examined a proposal to impose such a tax on the world’s highest-net-worth individuals. It also pointed out these efforts would need to be globally coordinated.
Such taxes could collect significant sums of money for governments. It’s previously been estimated a billionaire tax could raise US$250 billion (more than A$380 billion) globally if just 2% of the net worth of the world’s billionaires was taxed each year.
The case for a wealth tax
Inequality is on the rise and the argument for a wealth tax can’t be ignored – not least here at home. According to the Australia Institute, the wealth of Australia’s richest 200 people has soared as a percentage of our national gross domestic product (GDP) – from 8.4% in 2004 to 23.7% in 2024.
If that sounds dramatic, the picture is far worse in the United States. So, what would a wealth tax look like in Australia (noting that in reality a globally coordinated effort would be needed)?
The starting point for this is understanding of why high-net-worth individuals seemingly pay very low taxes.
High net worth, low tax rate
Income taxes only take into account any amounts that are received in the hands of the taxpayer – whether that is a company, a person or a trust.
Most high-net-worth individuals do not receive much income directly but “store” their wealth in companies and other corporate structures.
In Australia, the maximum applicable tax rate for companies is 30%. Note that the highest tax rate in Australia for individuals is 45% plus the 2% medicare levy, effectively 47%.
Assets such as real estate may also be held by companies or trusts, and the increase in value of these assets is not taxed until they are sold (through capital gains tax).
Even then, those gains may not be paid out directly to the high-net-worth individual who owns these entities.
Unrealised gains
So, how do we tax wealth that is sitting in various businesses (company structures) or other entities, but isn’t taxed at present because the “income” or “gains” from these are not taxable in the hands of the wealthy individuals who own them?
This goes into the murky area of taxation of unrealised gains. Here, we need to tread very carefully. But we also need to recognise that we already do this, albeit rather subtly, and most of us are not billionaires.
In your rates notice from your local council, for example, the increase in value of your residence or investment property is used to calculate your rates.
The real difficulty, to carry on with this example, is that your residence or investment property is typically held in your name and so the tax can be directly levied on you.
Felix Mizioznikov/Shutterstock
Making tax unavoidable
As we’ve already explained, the bulk of the assets or net worth of wealthy individuals is not directly attributable to them. Does this mean we should give up altogether?
Not quite. UNSW professor Chris Evans has pointed out that while we may not be able to effectively tax all the net worth of the wealthy, there are some things we can tax and they can’t avoid it.
An obvious example is real estate. You can pack your bags and bank accounts and move to a low-tax country, but you can’t move your mansion overlooking Sydney Harbour.
Real estate, both residential and commercial, provides one clear way in which we could implement a partial wealth tax. This method (which also has fewer valuation issues than value stored in a company in the form of retained profits) also counters the argument that the wealthy will simply move to other jurisdictions that won’t tax them.
There is plenty of academic research looking at various wealth tax initiatives in other countries. We should learn from these, including the experience in Switzerland and Sweden.
In Sweden, for instance, research found the behavioural effects of wealth taxation were less pronounced than those of income taxation, but the system had so many loopholes that evasion was an option for some people.
Change faces headwinds
In a very uncertain world that features ongoing wars and an unpredictable US president, any change that seeks to address issues of inequity is going to be met with resistance by those who hold power.
Some billionaires in the US, however, have expressed their support for being taxed more in a letter signed by heirs to the Disney and Rockefeller fortunes. That offers some hope, and suggests the discussion about wealth taxes should not be relegated to the “too hard” basket.
Some steps towards taxing the uber-rich would be better than the status quo.
Venkat Narayanan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
– ref. Some economists have called for a radical ‘global wealth tax’ on billionaires. How would that work? – https://theconversation.com/some-economists-have-called-for-a-radical-global-wealth-tax-on-billionaires-how-would-that-work-257632