TECHNOLOGY AT WORK

February 2015
Citi GPS: Global Perspectives & Solutions
87
Money to fund the gap can be generated by
raising top marginal income tax rates,
introducing wealth taxes or taxing goods and
services used primarily by the wealthy
But in times of high (and often still-rising) public debt, an appropriate follow-up
question would be where the resources can be found to fund such additional
spending? The answer to this question is not obvious. This is despite the fact that in
principle there are several fairly obvious candidates. Our analysis has shown that
there are, of course, beneficiaries of the changes we describe. Some of the
potential options to generate the money to fund additional spending could come
from raising taxes on the better-off. In principle, this could happen by raising top
marginal income tax rates, increasing capital income tax rates, raising corporate
income taxes, introducing some form of wealth taxes or taxing goods or services
that are primary consumed by the wealthy more heavily. 141
Such changes in taxation would seem sensible to us, but they would also be a
reversal of the trends of the last few decades. The OECD notes that top statutory
personal income tax rates have fallen significantly in each of the three decades
between 1980 and 2010. 142 In 2010, the OECD average top statutory personal
income tax rate was 41.7%. In 1981, it was 65.7%. Corporate income taxes have
also fallen in recent decades, from 49% in 1981 to 32.5% in 2013.
Piketty famously called for global wealth
taxes in 2014
Wealth taxes could be a solution but they
are difficult to design, costly to administer
and relatively easy to evade
However, some of these trends may already be reversing. A number of countries
already increased their top personal income tax rates in recent years. There is no
sign of headline corporate income tax rates rising systematically across countries.
But significant efforts are under way to close loopholes in the current fiscal
arrangements for corporates, to make life harder for tax havens and to tackle tax
evasion and avoidance more effectively.
Could wealth taxes be the solution? Thomas Piketty made headlines in 2014 when
he famously called for global wealth taxes as one of the main policy responses to
rising (income and wealth) inequality. Piketty called for a tax of 1% on wealth of
between €1-€5 million, 2% on wealth of €2-€5 million (and a much higher tax on
even larger fortunes), and even the IMF has noted that a wealth tax may be
appropriate in some circumstances. Yet outside of extreme circumstances there
have been few (and usually only timid) attempts to increase the taxation of financial
or real property in recent years (and they are quite rare in history). Similarly, the
taxation of capital income has become increasingly prominent in policy discussions
and speeches, notably the special treatment offered to particular types of capital
income (such as for ‘carried interest’ of private equity owners). In his recent State of
the Union address, US President Obama once more called for increases in capital
income taxes and for abolishing some of these privileges. Yet we have seen very
little in the way of an effective increase in the taxation of capital income anywhere.
One of the reasons why wealth taxes have not been raised more widely is that they
are difficult to design, costly to administer and often relatively easy to evade. For
ad-hoc wealth taxes, the risk is that households would fear that such taxes could be
imposed again in the future. For financial assets, a major risk is that the capital will
simply find a home elsewhere — a growing issue in a world of global financial
mobility and still-increasing financial interdependence. Wealth taxes would therefore
be much more likely to be effective if they were imposed globally (as Piketty
argues). The same applies for corporate income and capital income taxation, but we
see little scope for such an initiative in a world where global leadership is rare in any
area, not least against what would likely be fierce lobbying.
141 Another direction would be to reduce other government expenditures. Given
historically high ratios of government expenditure to GDP in many countries, this route
strikes us as eminently sensible, but is outside the scope of this section.
142 See OECD (2011), “Taxing Wages”
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