Taxing the rich isn’t radical – not taxing them is

11 months ago 50

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The new European Citizens’ initiative, which seeks to implement a European wealth tax to support the green transition comes with a healthy dose of EU direct democracy – and is a reminder that global taxation of the richest few is both fair and badly needed.

Listen to speeches by high-level EU officials, heads of states and EU ministers: they just can’t stop talking about ‘the green transition’ and ‘decarbonisation’, promising to whoever cares to listen their ‘non-negotiable’ / ‘absolute’ / ‘unwavering’ support to reach net zero by 2050.

Covering industry and economics for Euractiv has given me an open-ended list of key words and sentences with inherently contradictory syntaxes (but somehow it sounds good?) that include wanting to save the environment but enhance growth, bring industry back but keep inflation in check, and make budget rules fairer but throw in some requirements so stringent austerity is bound to come back with a vengeance.

Oh, and finally creating a Capitals Market Union all the while knowing the legislative work underpinning that is so large it could not be put in place speedily enough to meet the urgency with which we must tackle climate change.

Yet one option just isn’t even worth a political conversation: a European wealth tax.

From as long as liberal economic thinking exists, a wealth tax on the ultrarich is either innovation-stifling, anti-growth, or so counterproductive it would encourage fellow well-off citizens to find shelter in other, more accommodating parts of the world.

This argument is flawed, and amounts to collective ecological suicide.

Taxing the wealthiest 1% is economically sound: their wealth is often primarily financial, with little to no impact on the real economy.

The 2022 World Inequality Report found no correlation between tax expansion and the hampering of economic activity, quite the opposite (see our Chart of the week): “Periods of tax expansion and high progressive taxation boosted Europe and the USA in terms of growth and employment more than periods of low tax progressivity or tax stagnation”.

Taxing the richest is also fair: it shares the burden of green transition costs, especially as the world’s wealthiest contribute disproportionate CO2 emissions. The top 1% were responsible for 16% of the world’s total CO2 emissions in 2019, Oxfam revealed this month.

Thus, the new European Citizens’ initiative to implement a European wealth tax – that is, force EU institutions to start thinking about it properly – is a breath of fresh air in a European landscape that does not have the cash to meet its objectives.

Between 2011 and 2020, the European Commission estimates that the EU has spent an average of €683 billion annually to transition energy systems.

This is due to increase to €947 billion in the 2021-2030 period and top €1196 billion between 2031-2050 to stay in line with the Paris Accord.

These numbers are big, but not big enough: it’s very likely the cost of the green transition has been underestimated, a (brilliant) peer-reviewed study published in Ecological Economics in July by German, Austrian and British scholars found.

This is because “a) the focus on 2050 does not take into account the necessity for rich nations to decarbonise faster than the global average; b) the investment requirements for the building and energy sectors are likely to be underestimated substantially; and c) these estimates require underlying climate or economic models to err only on the side of caution,” it reads.

Accounting aside, the failure of the Commission to come up with a valid European Sovereignty Fund and the sheer refusal to even consider – to Emmanuel Macron’s despair – a new round of joint EU debt has put into question EU institutions’ genuine willingness to tackle this climate emergency heads-on.

The imbalance between grand European rhetoric and weak European financing is jarring.

And don’t get fooled: member states certainly don’t want to foot the bill either.

Moreover, the row over the nature restoration law and the surprise rejection of the EU Pesticide Reduction Regulation (Sustainable Use Regulation, SUR) shows a growing political disinterest in the Green Deal legislative package, which is seen to be too hurtful to European citizens or at least to a politically influential subset of European citizens.

It left leading French EU journalist Stéphane Foucart to conclude over the weekend that, “for the first time, the EU has started walking backwards on environmental matters”.

A European wealth tax is more necessary than ever, and the initiative should be signed even if tax files are notoriously tricky at an EU level as member states have to agree unanimously. Securing at least one million signatures by October 2024 from at least seven member states (and a minimum number of signatories in each), as the initiative process requires, will give the topic democratic momentum and political impetus.

The European Parliament itself found a wealth tax could bring in an annual €200 billion if it focused on the continent’s richest 0.5%. The Ecological Economics study found that a wealth tax if appropriately implemented, “would be an effective tool to close the EU’s green investment gap”.

Sign away.

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Chart of the Week

Classical economical thinking has often associated tax increases with reduction in economic growth.

Past certain thresholds, this may be true, but the 2022 World Inequality Report finds there is no historical evidence between economic growth fluctuations, and tax rates for the richest few.

The graph below shows that a general reduction in tax levels in the EU from the 1980s has had no incidence on economic growth. The same holds true for the US.

You can find all previous editions of the Economy Brief Chart of the week here.

Economic Policy Roundup

OECD warns France’s deficit projections are too optimistic. The French government’s deficit reduction projections are not realistic, the Organisation for Economic Cooperation and Development (OECD) found in a report published on Wednesday (29 November), stating France ought to “step up the pace of fiscal consolidation”. This is yet another blow to French government’s numbers, after the European Commission published an opinion last week, which hinted that the country may be subject to an Excessive Deficit Procedure come the spring. Read more.

No solution yet for Germany’s €60 billion problem. The German government has not yet presented a solution on how to fill the gap of €60 billion in its “Climate and Transformation Fund” after a ruling of the constitutional court had slashed the sum. The fund was meant to finance several green investments and subsidies over the coming years, including buildings renovations, electric mobility, and hydrogen. In a speech in the German parliament on Tuesday (28 November), chancellor Olaf Scholz tried to downplay the impact of the ruling, prompting harsh criticism from the opposition. Read more.

Germany’s skilled labour shortage puts vital industries at risk. A dire talent shortage is threatening the success of vital industries in Germany, according to an annual report from the German Chamber of Industry and Commerce (DIHK). An estimated 1.8 million positions remained vacant in the overall economy, resulting in a staggering loss of over €90 billion this year, equivalent to more than 2% of the GDP, the DIHK’s deputy chief executive, Achim Dercks, claimed. Read more.

Campaigners call on ECB to faciltate investments into energy-efficient housing. On 30 November, a coalition of civil society organisations delivered a petition to the European Central Bank. The petition asks the ECB to implement differentiated interest rates for banks that provide homeowners with cheap loans to finance energy-efficient home renovations. Heating is one of the big sources of European CO2 emissions.

EU Council approves EU-New Zealand free trade agreement. On Monday (28 November) EU trade ministers gave the final green light for the trade deal with New Zealand only a week after the EU Parliament gave its stamp of approval. The trade deal is yet to be ratified by New Zealand, after which the trade deal will come into force within two months.