Rising inequality has been an inescapable phenomenon of global economic development over the past 200 years. Per the United Nations’ Sustainable Development Goals, growing inequality affects 70% of the global population and threatens “long-term social and economic development, [harming] poverty reduction and [destroying] people’s sense of fulfillment and self-worth,” all of which “can breed crime, disease and environmental degradation.”
As a core response, civil society organizations, social movements, the media, and academics have proposed a wealth tax on a country’s richest citizens. A wealth tax is a levy imposed on an individual’s net worth, i.e., all the forms of wealth that are acquired.
Resistance from both the government and the corporate sector, however, has been intense. In response, proponents have outlined the rationale for a wealth tax in light of the existing political, social and economic situation.
The most important rationale for a wealth tax is to reverse the age-old trend of rising inequality. Wealth taxes are meant to move society in the opposite direction, that of promoting equality. Economist Jomo Sundaram stresses the need to “get more revenue from those most able to pay while reducing the burden on the needy.”
Surprisingly, both the World Bank and the International Monetary Fund (WB-IMF) have come out in support of a wealth tax to counter rising global inequalities. This surfaced in a joint WB-IMF conference on Oct. 19, 2021, which noted “the persistence in income inequality” and concluded that a “progressive tax policy is one of the prime tools for addressing such inequality.”
Secondly, a wealth tax is also meant to respond to social unrest and restiveness. Incidents of unrest stemming from inequality include the Occupy Movement of 2011–12, the London riots of August 2011, the Yellow Vests revolt in France in 2018, the Black Lives Matter, #MeToo movement, and Fridays for Future movements.
All these mobilized “people around racial, gender, and climatic inequalities, across national borders and generations.” A major issue was corporate greed, in which economic and political power is seen to be at direct odds with democratic principles.
A third rationale for a wealth tax is to correct the current dominant regressive tax system throughout the world. Even as the wealth of the richest has grown by leaps and bounds, their tax rates have also collapsed. On the other hand, the tax rates of the low-income working classes have become higher than that of the billionaires.
These reversals have become more prominent in the last four decades as governments have implemented tax reforms favoring regressive and consumption taxes while reducing taxes of corporations and the wealthy. The tax burden has therefore shifted from the upper classes to the poor classes.
Fourth, the richest people are also the most notorious for rampant tax evasion. The world’s top billionaires, particularly the owners of Amazon, Apple, Facebook, Google, Microsoft, and Netflix have avoided paying billions of dollars in taxes by transferring their wealth to tax havens outside the United States where they also set up shell companies.
Researches have revealed that tax rates by the top billionaires like Warren Buffet, Jeff Bezos, Michael Bloomberg and Elon Musk range from 0.10% to 3.27% while corporate tax rates hover at 35%.
In the Philippines, the richest are not necessarily the top income taxpayers. The Department of Finance’s Tax Watch service showed that for 2012, “only 25 out of the 40 richest Filipinos (as reported by Forbes) are on the Bureau of Internal Revenue’s (BIR) list of top individual taxpayers.”.
Even when identified and charged accordingly, rich tax evaders are also able to escape prosecution or penalties. The BIR’s “Run After Tax Evaders” project has a pitiful accomplishment record. Out of 929 cases against tax evaders from 2005 to December 2018 with total tax collectibles of P148.35 billion, only 14 have been resolved, with only 10 convictions.
The fifth reason is that, on top of grossly underpaying their corporate taxes, the richest individuals and families also take advantage of huge corporate tax breaks and tax holidays that governments grant. Aside from regular investment laws, enclaves such as special economic zones (SEZs) suspend normal rules and regulations on taxation and other laws.
In the Philippines, while the regular corporate tax stands at 25%, firms in SEZs pay no more than 5%. Other perks include tax-free imports and exports while governments shoulder the costs of infrastructure development, such as airstrips and factory buildings.
Sixth, a large chunk of the wealth held by billionaires and the upper crust of the rich stems from unearned superprofits that are not plowed back into the economy through new and added investments. This has been calculated by “estimating a ‘normal’ rate of return versus the actual rate of return,” which can show when “profits have exceeded normal rates of return.”
Global firms also generate what are called “false profits.” These are profits that are not based on value-added or on economic activities. The impact is to shovel wealth to selected actors that has nothing to do with their roles in the economy.
Seventh, the issue of unearned profits is related to the issue of declining labor shares in the gross value created by economic production that is disproportionate to the increasing shares to the capitalist class. This is rationalized as a “tradeoff[s] between labor and physical capital” as firms have allegedly “substituted expenditures on labor inputs into production.”
This trade-off, however, is illusory, as shown above. Furthermore, by charging consumer high prices that are not justified by production costs, the corporate sector is merely accumulating unearned profits at the expense of labor.
Eighth, to raise funds for pandemic responses, governments, especially in developing countries, have had to incur large foreign and domestic loans. This sparks an impending debt crisis.
The Philippine government’s debt, for one, has increased by 20% from a year earlier. The debt-to-GDP ratio of 63.5% pushed the country past the recommended threshold of 60% for debt manageability. In terms of raising government revenues, taxes and debts have been the main ways. In general, taxation is by far preferable to debt in terms of justice and efficiency. It is far better to tax the wealthy rather than borrow from them.
Ninth, a wealth tax could go a long way in funding responses to the Covid-19 pandemic, especially in developing countries. This can help finance vaccine procurement, upgrade health services, and facilitate social amelioration, emergency employment, and education campaigns.
Since 2020, the Philippine government has had to borrow P1.3 trillion and access foreign grants of P2.7 billion mainly to procure Covid-19 vaccines.
Since existing inequalities are multidimensional, imposing a wealth tax is an important step toward addressing many of the more pressing problems of human societies. And it can render reparations to the billions of people worldwide who have been marginalized by the injustices of the system.
This article is extracted from the author’s Policy Brief (2022-07) of the same title published by the University of the Philippines’ Center for Integrative and Development Studies, Program on Alternative Development (UP CIDS AltDev). — Eduardo C. Tadem, Ph.D.