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Home Opinion An international tax on the wealthiest citizens of the world

An international tax on the wealthiest citizens of the world

Patrick Weil - 26 May 2011

The recent financial crisis has not inspired confidence in our political leaders’ ability to deliver global justice. On the contrary. In North and South America and in Europe a large majority of the population feels that even though states have successfully saved the banking system, bankers are now renewing risky practices in pursuit of profits and awarding themselves enormous bonuses. This has occured against the longer term backdrop of a huge increase in the gap between the wealthiest 0.1% of the population and the middle class over the last 30 years.

1. This situation favours populist reactions, with all their manifestations of xenophobia, anti-government backlash and racism. It encourages revolutionary discourses that might not prove beneficial to progressives since their advocates seem unable or unwilling to think about sustainable solutions. The lack of will, or at least the manifold constraints involved in taking bold, affirmative action, that impedes governing elites in today’s world erodes the foundations of democratic regimes. At best it gives the impression that elected representatives have lost the power to act in favour of a fairer society; at worst, it reinforces the prejudice of solidarity and the complicity of elites against the majority of the people. A key political problem for the centre-left is the perception that pursuing justice by taxing the wealthiest part of a national population might lead to negative economic consequences. Wealthy individuals can always change their country of residence. When a state imposes taxes across national borders on its nationals wherever they reside, more and more frequently these individuals choose to change nationality. Recent research shows that while, for example, 28 billionaires live in Switzerland, only 11 are Swiss nationals; likewise, four live in Monaco but only one is a citizen of the principality.

2. Citizens in the United States and Europe simply expatriate to avoid or reduce tax. The United States is the only developed country that taxes based on nationality rather than domicile. This has inspired the ultra-wealthy to renounce their citizenship in order to avoid paying US taxes. The Heroes Earnings Assistance and Relief Tax Act of 2008 was an attempt to reduce this phenomenon by subjecting certain voluntary expatriates (citizens who give up their citizenship and permanent residents who give up their green cards) to a “mark-to-market” exit tax. This means the expatriate is subject to income tax on the net unrealised gain in her property as if she had sold it on the day before she expatriated. Since 2008 the number of Americans who have expatriated has multiplied by at least four (from 238 in 2008 to 1027 in September 2010).

European countries use a modified territorial system, under which income earned outside the territory is not subject to tax. “Thus, a resident of a country within the European Union can earn income from sources outside his home country and will not be taxed on that income, regardless of whether the entity earning the income is a resident of the country or not.” The incentive in this situation is therefore to become resident in a country with a low tax burden while retaining citizenship in whichever country you wish.

3. Efforts at international coordination exist but have so far had little effect. The members of the G20 have united to stop tax evasion, recently forming the Global Forum on Transparency and Exchange of Information for Tax Purposes, declaring that “tax avoidance and tax evasion threaten government revenues throughout the world” and that “globalisation generates opportunities to increase global wealth but also results in increased risks”. It has begun investigating and publicly evaluating the transparency and information-sharing practices of member states that have reputations as tax havens; the first batch of reports covers Bermuda, Monaco and the Cayman Islands, among others.

The United Nations, in 2004, strengthened the mandate of the pre-existing Ad Hoc Group of Experts on International Co-operation in Tax Matters, renaming it the Committee of Experts on International Co-operation in Tax Matters. The committee’s responsibilities include developing and updating a model tax treaty between developed and developing countries and providing a framework for dialogue to enhance and promote international tax co-operation among national tax authorities.

To tackle this problem, proposals should be made that respect the right of human beings to enjoy citizenship (not to be deprived of it), to shift citizenship, and even to enjoy multiple ones: this right has been conquered against statelessness, for example in the aftermath of the Second World War, and this conquest should be protected against further infringement. The following proposals have, therefore, been designed in respect of these considerations.

4. An international tax should be imposed on the world’s wealthiest individuals independent of their citizenship. For example a 1% tax on the 1210 billionaires of the world in US dollars would represent in 2011 $45bn. This tax would be a contribution to the funding of international organisations, with priority given to UN development agencies, the World Bank and the International Monetary Fund. It could come as a deduction from the contribution owed by an individual state to the different international organisations to which it belongs. This tax would be levied by the state of residence or – in case of refusal or failure to levy the tax – by any other UN member state. In case of an individual changing nationality, the tax would be assessed on the basis of the states to which the individual has belonged or currently belongs, on a ratio derived from the number of years he or she has enjoyed each successive nationality. If the amount of tax levied exceeds the amount of the contributions due by the nation state to whom the individual has belonged or belongs, the surplus will go to the reimbursement of the debts of these nation states to these international organisations or to their direct funding.

5. As this tax could be deducted from the dues owed by states to different international organisations, it could be acceptable to the wealthiest states in the world. Such a tax would increase global justice while also benefitting the largest countries in the world and their citizens by reducing the expenses paid by their state. It would also reduce the incentive for an individuals to change their country of residence and/or nationality. It would benefit the poorest countries in the world by reinforcing international organisations in which they participate on an equal footing. The costs would be paid mainly by the world’s wealthiest citizens and by tax haven countries which might become less attractive.

6. For the implementation of this tax, co-operation between nation states will be necessary: the level of tax will have to be decided and its allotment; all things which will encourage global and international debate about wealth, justice and development. It will help to reestablish confidence in our democracies and the legitimacy of their institutions. It will reinforce the community of nation states. But, in addition, it will also encourage the feeling of being part of a world and global community of human beings sharing values and principles and deciding to tackle together common problems with new instruments for global justice.

Patrick Weil is visiting professor of law and Robina Foundation international fellow at Yale Law School and a senior research fellow at the French National Research Center in the University of Paris, Pantheon-Sorbonne

This essay is a contribution to the Policy Network publication "Priorities for a new political economy: Memos to the Left", which was presented to the Progressive Governance Conference in Oslo on 12-13 May

© Policy Network

This is a contribution to Policy Network's work on Globalisation and Governance.

Tags: Tax , tax evasion , social democracy , citizenship , global justice , policy Network , Patrick Weil

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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