Two-thirds of Europeans want governments to do something about wealth inequality and see taxing the super-rich as an important task of their administrations. Few topics enjoy such high approval rates: in Austria, for example, 80% of the population wants higher wealth taxes for the rich.

Because the thing with the really wealthy is they probably pay less tax than you, proportionally. Legendary American investor Warren Buffett once said in an interview that he was legally obliged to pay fewer taxes than his receptionist despite being one of the world’s richest individuals. He was not wrong: most billionaires do not receive a traditional, taxable income. Instead, they keep most of their money in stocks and other financial assets, which are only taxed when they are sold at a profit. As billionaires usually only sell very few shares – enough to cover their expenses – they are taxed on these so-called capital gains rather than on a normal salary or income earned as employees.

You may ask, don’t billionaires already do a lot of philanthropy, using their money for the public good? Only very few billionaires actually give significant amounts of their wealth to philanthropic activities. In the US, 264 out of the top 400 billionaires have given away less than 5% of their wealth, according to numbers by the Forbes Philanthropy Score. While a similar ranking is missing in Europe, our investigation essentially confirms that European numbers coincide with the American ones.

However, there are a few billionaires who finance valuable work for the enhancement of democracy and human rights, such as George Soros' Open Society Foundations. However, many civil society organisations consequently depend on funding from those philanthropists, which can cause existential problems when funding gets withdrawn, as shown by Open Society Foundations' recent announcement to completely stop funding in Europe. In some countries, civil society hinges on the commitment of a few individuals or institutions, which act completely outside democratic control or decision-making.

So, philanthropy is not something to be counted on. There are many ways to lift people out of poverty and make the broader population wealthier. However, to actually reduce the extreme levels of wealth concentration at the very top, there's really only one way: taxes, taxes, taxes. What, then, is needed to tax the wealthy more?

Lawmakers need the know-how

The political influence of the wealthy is one of the reasons why the richest don’t pay more taxes. However, there is more to it: there is a lack of policy competence when it comes to financial issues, especially on the left. A recent study interviewed progressive German politicians and found that when it comes to taxation issues, both lobbying and a lack of knowledge hinder the introduction of a wealth tax. Political youngsters tend to join left-wing parties because they are primarily interested in work and social affairs, and less in financial issues – while there are waiting lists among conservative parliamentarians to join finance committees. The huge, and sometimes artificially increased, complexity is used to cement the status quo.

To effectively reduce wealth inequality, tax policy needs to become a matter close to the heart of progressive parties. Otherwise politicians seem to be left clueless and overwhelmed when confronted with resourceful anti-tax actors.

Capital gains tax

Taxing the super-rich is a tricky thing. The way the majority of their wealth is stored – in stocks – allows for quick transfers, even across country borders, making it easy to manoeuvre around newly imposed taxes. Furthermore, one does not even know the value of certain assets, such as real estate. If, say a castle, isn't being sold, one can only estimate how much said castle is worth as it's not being valued. And these estimates vary heavily.

However, in principle, economists have found two main ways to reduce the sums billionaires own: capital gains tax and wealth tax. As laid out above, very wealthy people are usually taxed proportionally less than people with normal income, as they rely on capital gains from selling shares. Some of the countries with the most millionaires and billionaires per capita, such as Luxembourg, Switzerland, and Belgium, do not levy any capital gains tax. In European countries which do levy tax on capital gains arising from the sale of listed shares, said tax averages at 19.4%. For comparison: personal income tax in Europe averaged at just over 40% from 1996 until 2021, according to the European Commission.

Wealth tax

However, the income of billionaires is only a fragment of what they own, as most money is kept in assets, such as stocks and bonds, real estate, luxury items, and cash. All of this wealth is systemically undertaxed. Out of the 12 European countries which had a wealth tax in 1990, only Norway, Spain, and Switzerland still have this tax today.

A wealth tax can also come with liquidity issues. Wealth is often is stored in stocks, whose value is constantly changing. Would people now be required to sell a share of their stocks in order to pay their taxes, this may devalue said stocks, leading to wealth loss for the individual and market disruptions in general. There are also timing issues: taxpayers might have to sell assets in a down market to meet tax obligations, leading to further wealth erosion.

Another reason why many countries saw the wealth tax abolished was because its progression hit very early, already affecting those with just a couple of millions on their bank accounts, instead of billionaires. Subsequently, many wealthy people left for countries without such a tax, reducing the overall tax income of their departure countries – for example, this happened after Norway slightly increased its wealth tax recently. There, the social-democratic government increased the wealth tax from 0,85% to 1,1%, causing major capital flight by many of the country’s billionaires. They’re taking so much money with them, that the wealth tax is projected to result in more than 500 million euros less revenue than it currently generates.

European solution

There are workarounds to this issue. To prevent billionaires from moving to other European countries, the tax needs to be the same across multiple countries, similarly to the new global minimum corporate tax rate of 15% on multinationals, introduced by the Organisation for Economic Cooperation and Development (OECD). However, places outside communities such as the OECD or the EU remain, making it very difficult to completely prevent the possibility of capital flight.

There is movement in the debate on the European level. This June, a group of economists, activists, politicians, and multimillionaires started a European citizens’ initiative, demanding that the European Commission adopt a permanent and progressive annual wealth tax. To make it work this time, a team of economists around star economist Thomas Piketty propose a high threshold which ensures that only a small group of the super-rich would be affected. Furthermore, as one does not choose parents, inherited wealth should be taxed more than income or “self-made” wealth. While European citizens’ initiatives are rarely successful and the EU’s legislative competence on taxes is limited, this could serve as an example which left-wing groups could rally behind in the runup to the European elections of 2024.

More transparency

We’ve put a lot of work into this investigation, trying to unveil how the super-rich influence national and international politics. While we found a lot, we also need to be honest: there is still much to be uncovered. We as societies have little insight into the dealings of most super-rich and how they play a role in politics. We need to understand the extent of wealth concentration – especially the impact it has on democratic processes and decision-making – to discuss what could and should be done about it.

But this needs to be a collective societal effort, led by stricter transparency requirements.In Norway and in Finland, tax returns of all citizens are published every year, without exceptions, for anyone to inspect. Media outlets can search through a website to compile lists of the country’s highest earners. Maybe something to take inspiration from?

28 September 2023: The segments about wealth tax and capital gains tax have received minor updates for clarity and accuracy.