Brussels has a new guide on taxation: wealth concentration must be combated

BarcelonaThe European Commission has a new diagnosis on taxation that points to higher incomes and large fortunes. According to a study published by the Community executive, over the last thirty years there has been a concentration of wealth in the wealthiest segments of the population in the European Union, which calls for rethinking taxes on wealth, inheritance, and capital income in the EU to reverse this trend.

Wealth Taxation, Including Net Wealth, Capital and Exit TaxesThe report, titled Wealth Taxation, Including Net Wealth, Capital and Exit Taxes (The taxation of wealth, including taxes on net wealth, capital, and exit), was published in March by the Directorate-General for Taxation and Customs Union of the European Commission and prepared by a consortium of economic research centers and consultancies, including the Barcelona Institute of Economics (IEB) of the University of Barcelona (UB). This document is the first of two volumes on taxation in the EU and is intended to be one of the guides for Brussels' future fiscal policies.

"First we had millionaires, then billionaires, and now we are talking about ultra-millionaires," says the director of the IEB, Josep Maria Durán Cabré, and one of the two UB researchers who collaborated on the study, along with economics professor Alejandro Esteller. The two IEB researchers have worked mainly on the part dedicated to the wealth tax in Spain, the only EU state that still maintains it (Norway and Switzerland also have it, but they are outside the Community club).

This is one of the most controversial taxes, as several countries have been abolishing it. "For technical reasons, it has been considered that it was not a good tax and that it collected little," explains Durán Cabré, but, even so, it has recently reappeared in technical and political debates at the hands of economists specialized in inequality, such as Gabriel Zucman. The main difficulty of the tax is that the exact value of taxpayers' assets must be correctly assessed each year, which can be complicated in cases such as real estate or shares in companies that are not listed on the stock exchange, explains the director of the IEB.

"Wealth taxes can play a larger role in addressing high and growing wealth inequality in the EU," says the document published by Brussels. "Given the scale and concentration of private wealth and inheritance transfers, and the high reliance on labor taxation, there are arguments for re-examining and, where appropriate, strengthening the contribution of wealth taxes to finance European welfare states," it adds.

In this regard, the document questions the arguments of recent years in favor of not taxing large fortunes, such as that, if tax pressure on the richest increases, business investment and hiring fall, since it is precisely the people who accumulate more wealth who usually manage and create the large companies of a country. In this sense, the study admits that taxes such as wealth tax, inheritance tax, or capital gains tax can, "in principle", affect savings, investment, and entrepreneurship, the reality is that they always end up having a much lower negative effect: "The empirical evidence reviewed suggests that these [negative] effects are generally modest and that well-designed taxes can even support a more productive use of assets".

Good design

Precisely for these types of taxes that tax wealth, "the design is very important," says Durán Cabré, a fact that the study also points out: "The design of taxes is central to achieving collection and redistribution objectives," it reads in the report.

In this regard, the study adds that "the benefits of wealth taxes depend heavily on their interaction with other elements of the tax system," although it points out that, "as a general rule," a "generalized taxation on capital returns through well-functioning taxes" on capital gains and capital appreciation, combined with a "robust" inheritance and gift tax, can be "the backbone of wealth taxation."

The document asks, however, that "any move to strengthen taxation on wealth" be accompanied by "transparent communication about who will be affected, how the revenue will be used, and what measures are included in a broader strategy for tax justice".