A European wealth tax for a fair and green recovery

The European Union faces the twin crises of Covid-19 and climate change. Confronting both crises leads to an unprecedented demand on public resources which in turn leads to the question of how to raise the required funds a) without jeopardising a weak economy recovering from the pandemic and b) without undermining broad political support for climate action. This policy study investigates the potential of a European net wealth tax to raise substantial revenues while supporting the economy and the consensus on climate action. To achieve this, household survey data from the European Central Bank (covering 22 EU countries) are analysed. To address the problem of under-reporting of wealth at the top of the distribution in survey data, a Pareto distribution is fitted to the right tail of the data and used to create an amended data set which also represents these missing rich, whose wealth goes unreported. The Pareto-amended data show that household wealth is highly concentrated among the wealthiest households: the richest 1% hold 32% of total net wealth in the EU22 while the poorest half of all households only hold about 4.5% of total net wealth. These data are then used to estimate revenues for four different tax models. The results show that annual revenues between €192 billion (1.6% of GDP) and €1,281 billion (10.8% of GDP) across the EU22 are possible. Non-progressive (flat tax) designs yield revenues at the low end of this range while strongly progressive designs are responsible for the high revenue estimates at the upper end of this range. Conversely, the models’ ability to actively reduce the current concentration of wealth in Europe varies with the degree of progressivity of the tax design. In sum, a net wealth tax exhibits high revenue potential, which is a direct result of the observed high levels of inequality and is far larger than that for other proposals currently being discussed at the European level. A combination of clever design choices, more resources and better infrastructure for the EU’s tax authorities would make a European net wealth tax feasible. With respect to the tax design, high exemption thresholds between €1 million and €2 million, paired with progressive tax rates and a broad tax base, imply that only the richest 1% to 3% of all households are taxed and thus the problem of illiquid tax subjects is avoided, while keeping the revenue potential high. Boosting tax authorities’ resources to enforce the tax and to build appropriate infrastructure, such as real estate valuation databases and company registers, will ensure high levels of compliance and enforcement. Best practice examples such as Switzerland (valuation) and Norway (third party reporting) exist and can be used as a point of reference for successful implementation. To strengthen compliance an implementation at the European level is desirable. The results of this policy study show that overall, a European net wealth tax has the potential to make a substantial contribution to the EU’s efforts to organise a decisive response to the twin crises of Covid-19 and climate change. A net wealth tax is not only attractive because its revenue potential ranks amongst the highest of the potential alternatives that are currently being discussed at the European level, but also because of its ability to reduce historically high levels of wealth inequality in Europe.