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By Pierre Briancon

BERLIN, Oct 14 (Reuters Breakingviews) - The debate over a wealth tax recently tore French politics apart. It’s also a recurring question among lawmakers in Britain’s governing Labour Party. A common refrain is that the necessary level of international cooperation to make a proper levy work is pie in the sky. But instead of an annual and permanent charge on wealth, policymakers may want to consider a large, one-shot tax on the ultra rich. It would help fight tax inequality, and could be justified by the extraordinary spending burden that governments are facing.

Most cash-strapped Western states face massive public investment needs over the coming decade, spanning infrastructure, defence and the green transition. Cutting spending will not be enough. And to increase revenue as the appeal of populist parties grows, governments must convince voters that their tax systems are fair.

Tapping the super-rich, in that respect, would be a step forward. In recent decades, wealth concentration has reached record levels. According to a report prepared by economist Gabriel Zucman for a 2024 G20 meeting in Brazil, the world’s top 3,000 billionaires have seen their wealth increase by more than 7% a year after inflation terms since 1987, compared with 3% for the global population. The wealth of the top 0.0001% is now equal to 13% of the world’s GDP, against 3% back then.

Over the same period, their effective tax rate - what is paid as a proportion of income - has decreased, reaching around 20% for billionaires in the U.S., France and the Netherlands, according to the Organisation for Economic Co-operation and Development. This compares with a 40% to 50% rate for the bottom half of the population across most of Europe. The wealthy mostly derive their income from invested capital, meaning dividends, interest payments or capital gains, charged at lower rates than labour. Furthermore, they have access to tax-avoidance schemes, including the capacity to move money to safer havens.

The experience of taxing the rich in Europe is limited and does not look like a success. The number of OECD countries with an individual wealth tax has gone from 12 in the mid-1990s to only five today. Recent plans for blanket wealth taxes have often failed, and not only because of principled opposition from conservative parties. Governments often equivocate on the details, most notably which assets to tax and when. Wealth is already taxed when inherited, although exemptions often limit the financial impact. In France, President Emmanuel Macron scrapped a tax on financial assets when he became president in 2017 but kept one on real estate holdings. Levying a charge on the ownership of small or mid-size companies could hinder economic growth. And slapping one on paper equity values, such as the virtual fortune of startup founders before an initial public offering, is counterintuitive on both tax justice and economic grounds.

One of the most widespread objections is that wealth levies risk an exodus of rich investors, businesspeople and bankers, who have an incentive and the means to move elsewhere. The attraction of Milan in recent years shows that this is a real risk. The Italian government set a 100,000 euro limit, now taken to double that amount, on taxes paid by foreign residents on their global income, prompting many a London financier to up sticks. The risk of massive tax exodus is, however overblown, including by those with a vested interest in shielding their assets. In any case, as shown in a study based on the experience of Scandinavian countries, an exodus of the rich may only have a limited impact on a country’s economy. The report found that a rise of 1 percentage point of the top wealth tax rate shrinks the targeted wealthy population by an estimated 2%. But it only reduces employment by 0.02%, and investments by 0.07%.

It's nonetheless true, however, that proponents often overstate the possible revenue from asset levies. The combination of tax evasion, avoidance and exodus can have a material impact on expected receipts. The eventual receipts of the mooted French plan may only amount to 25% of the theoretical revenue expected beforehand, according to Philippe Aghion, a London School of Economics professor and newly minted Nobel laureate.

An underexplored scenario, free from many of these downsides, is a one-off, backwards-looking charge. Governments can justify it as an emergency plan to face up to the unprecedented accumulation of massive public investment needs. By taking a snapshot in time of net assets and using it as the basis for the levy, governments could get around the tax-dodging risk. The exceptional nature of the policy would also reduce the risk of dulling entrepreneurs’ wealth-creating incentives. Governments could even stagger the payments over three to five years, to avoid creating an equity firesale among the well-heeled.

Such a tax could raise significant revenue. A LSE report has calculated, for example, that in the United Kingdom, a one-off wealth tax of 1% on assets above 2 million pounds would bring in 80 billion pounds ($106 billion) over five years. That’s equivalent to more than half of the government’s total borrowing in the last fiscal year. And if the receipts are dedicated to long-term public spending, the boost to growth could be significant, relieving state finances over the long term. The threshold could of course be adjusted higher, and the rate lower, depending on the government’s political choices and revenue expectations.

To maximise the impact, the one-off hit on wealth would have to come as a surprise – meaning a fast decision and swift implementation. It would also have to be significant enough to make it credible for governments to argue that they wouldn’t need a repeat. Using the justification of exceptional circumstances - whether geopolitics or global warming - would reinforce that idea.

A wealth tax, by itself, would not solve governments’ fiscal problems. It should only come as a complement to comprehensive budget plans, including tighter spending and growth-enhancing reforms. But raising taxes will be hard to avoid in most Western economies. Only by hitting the rich can governments explain why higher rates on the middle class, whether through income or sales taxes, will also be necessary. That is, unless leaders want to brave an electoral backlash or keep cutting benefits - which is just a way of taxing the poor.

Follow Pierre Briancon on Bluesky and LinkedIn.

(Editing by Liam Proud; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on BRIANCON/pierre.briancon@thomsonreuters.com))