The European Union Tax Observatory has published the ‘Global Tax Evasion Report 2024,’ calling for a 2% global wealth tax on billionaires. The report emphasizes the urgent need to combat tax evasion, which enables some billionaires to effectively pay between 0% to 0.5% of their wealth in taxes.
The Proposal: 2% Global Wealth Tax
The report advocates for the implementation of a global minimum tax on billionaires, set at 2% of their wealth. This measure is expected to address tax evasion and generate approximately $250 billion from fewer than 3,000 individuals. The report justifies this proposal by highlighting the modest nature of the tax rate in light of billionaires’ wealth growth, which has averaged 7% annually since 1995, adjusted for inflation.
Successes and Challenges in Curbing Tax Evasion
The report evaluates international efforts to combat tax evasion, citing significant progress in some areas. The automatic exchange of bank information, in particular, has reduced offshore tax evasion by a factor of three over the past decade. Before this measure’s implementation, households held an estimated 10% of the world’s GDP in financial wealth in offshore tax havens, most of which remained undisclosed to tax authorities and belonged to high net worth individuals. Today, despite still holding an equivalent of 10% of world GDP in offshore household financial wealth, only 25% of it evades taxation, marking substantial progress in tackling evasion.
Remaining Challenges in Offshore Tax Evasion
Despite these advancements, offshore tax evasion persists. The report identifies two primary reasons for this:
Non-compliance by Offshore Financial Institutions: Some offshore financial institutions do not comply with the requirement for the automatic exchange of bank information, often due to concerns about losing their customer base. Moreover, these institutions typically face no substantial threats or penalties from foreign tax authorities for their non-compliance.
Shift to Uncovered Asset Classes: Wealthy individuals who previously hid financial assets in offshore banks have shifted their holdings to asset classes not covered under the automatic exchange of bank information, with a particular focus on real estate. The report calls for an expansion of the types of assets subject to automatic exchange of information to address this issue.
Challenges in the Global Minimum Tax on MNCs
The report also evaluates the global minimum tax of 15% on multinational corporations (MNCs) adopted by 140 countries and territories in 2012. Despite initial expectations that it would increase global tax revenues by 10%, a growing list of loopholes has reduced expected revenues by a factor of 2. The report raises concerns about the “greenwashing” of the global minimum tax, where MNCs can use ‘green’ tax credits for low carbon transition to lower their tax rates well below the minimum 15%. For example, U.S. green-energy tax credits are estimated to amount to about 15% of U.S. corporate tax.
Emerging Forms of Aggressive Tax Competition
The report further highlights the rise of preferential tax regimes targeting wealthy foreign individuals, with the number of such regimes growing from 5 to 28 in the EU and the U.K. These regimes offer tax exemptions or reductions to incoming residents while maintaining the general income tax schedule applied to domestic taxpayers. This trend weakens overall tax collection, as governments willingly forgo tax revenues, and it inflicts negative spillover effects on other countries.