Interview with Gabriel Zucman, associate professor of economics at the University of California, Berkeley

“The wealth tax is the tax of these times–not the VAT”.

The super-rich are often presented as the source of prosperity for nations. But this account is simply not true, argues economist Gabriel Zucman in this interview. “The engine of economic growth is massive access to education and health; it is cooperation, the quality of the institutions. It has never been the case that just a handful of billionaires have driven growth in a meaningful sense”. For Zucman, extreme wealth is a problem for the proper functioning of the economy and democracy because it erodes institutions. Here he argues in favor of a wealth tax in Chile and promotes a registry of financial assets to know “who owns what” because “the power of wealth is even more extreme when it is opaque,” he said. Finally, he supports ending banking secrecy because not doing so is like saying, “we believe the rich should be able to evade taxes if they want to.”


Aquí, la versión en español. Here, the Spanish version


Translation (Spanish-English): Emilia Guzmán and Crsitobal Otero.

The public debate about the super-rich–about how they came to be rich and whether they should be taxed on their wealth–is dominated by economic arguments. This logic ignores the fact that extreme wealth provides extreme power and is, therefore, a political problem.

The public policies that economist Gabriel Zucman proposes for Chile in this interview are motivated by the conviction that democracy needs to control the power of the extremely wealthy. Extreme wealth allows them to “influence the policies and ideology that dominates society; it allows them to buy competitors and to fight against the tax authority. For that reason, there is a deep tension between extreme wealth concentration and democratic institutions,” Zucman told TerceraDosis.

Zucman is among the 20 most cited economists globally (he is 16th) and, along with Emmanuel Saez, drafted the wealth tax proposals of Bernie Sanders and Elizabeth Warren. The political challenge posed by extreme wealth has been addressed in his book “The Hidden Wealth of Nations”, which examines how tax havens were formed and expanded in “The Triumph of Injustice: How the Rich Avoid Taxes and How to Make Them Pay”, which he published with Emmanuel Saez in 2019. In these and other investigations, he highlights that a key defensive strategy of the super-rich is the ability to hide what they have. Today, governments are not able to make the super-rich really pay taxes because they control their assets through front companies. Zucman emphasizes this opacity. We will not make progress in reducing inequality or in controlling the power of the super-rich if we do not confront this secrecy. That is why he believes that a concrete way to tackle these issues is to create an asset registry of who owns what and to use this information to generate a wealth tax. Here he explains how.


Credit: Gabriel Zucman

Whenever there is extreme wealth, there is also a wealth defense industry to protect it.”


But what if the super-rich decide to leave when we tax them? According to Zucman, tax competition –which allows them to threaten to move to low-tax jurisdictions –is a policy that can be changed. «It is not a law of nature. It is a choice that countries make. And they can make other choices. For example, saying, ‘we will not accept tax competition.’ And to decide that if a billionaire leaves Chile, he will still have to continue paying taxes for a number of years, which may depend on the number of years he was a tax resident there.» The reason is clear: «If you benefited from Chilean infrastructure and Chilean workers and all the public goods that were collectively provided in Chile, it is perfectly logical that you still have to pay as if you were resident in Chile for a number of years», he explained.

– You have been advocating for a global registry of assets for a long time. Can you roughly describe what you have in mind?

– The idea is this: countries have had real estate and land registries for a long time. One of the main reforms during the French Revolution was precisely the creation of a land registry, which at the time represented essentially all wealth. But today, financial wealth is much more important, and we have no record of it. We don’t know who owns corporations, public debt, assets in financial institutions, etc. So, the idea seeks, first, to expand the registry of real estate that has existed for centuries to include financial assets. Second, it seeks to connect the different national registries with one at the global level. Because today the accumulation of wealth occurs globally, especially for the very rich who have assets in different countries.

– But why would we want to have a registry of financial wealth today?

-Creating transparency about financial ownership is important for several reasons. First, because of the lack of information on financial wealth, we are not taxing all forms of wealth. If we consider that financial wealth is much more concentrated than real estate and land, it makes sense to extend the tax there. And to do that you need to know who owns what.

A second reason is that people accumulate wealth to protect themselves from life’s turbulences, to have a safety net. But the very rich don’t accumulate for that reason; wealth provides them with power. It allows them to influence the policies and ideology that dominate society; it enables them to buy competitors and fight the taxing authority. For that reason, there is a deep tension between the extreme concentration of wealth – which means extreme concentration of power – and democratic institutions. We need institutions to regulate the power that wealth gives and to create transparency. Registering who owns what is one possible way to regulate some of that power. Or, to put it the other way around: the power of wealth is even more extreme when it is opaque. We have always been creating institutions that make it possible to exercise some democratic control over property and wealth, and they always need to be updated.

– Some may think that it is not feasible to build such a registry given the innumerable difficulties in keeping track of wealth.

-On the contrary, I think this is quite easy. When land registries were created centuries ago, we didn’t have computers and yet it was done. Financial wealth is no more complicated than real estate. Financial markets are very centralised. In each country, you usually have what is known as a «central securities depository«, which acts as the ultimate accountant for the owners of stocks and bonds that have been issued in that country.

-In your book The Hidden Wealth of Nations you argue that banks have this information. Then you ask, why can’t the state have this information?

-Exactly. Information on the ownership of financial wealth already exists in private institutions. It is not only in deposits but also in commercial banks, investment funds, etc. Financial intermediaries are obliged under anti-money laundering laws to identify the beneficial owners of the wealth they manage. For example, if I open a bank account in the United States, in Chile, in France, and I manage that account through shell companies or trusts, that does not change the fact that the banker has to know, under current regulations, the identity of the beneficial owner. If the banker does not know or chooses not to find out, he is violating the legislation that underpins the modern financial system. So, the information exists, but it is not used for statistical purposes or to create transparency. So just centralise it and use it to promote the public good. In addition to assessing wealth taxes, there are other legitimate uses. For example, if international sanctions are to be applied, as it has been proposed these days in the case of the Russian oligarchs.

– If it is so easy and the EU has been pushing for sanctions against the oligarchs, why has this information not been used?

– At the beginning of the Russia-Ukraine war, I had some hope that an effort would be made to identify the foreign holdings of Russian oligarchs, many of which are in the European Union – in places like Luxembourg and Malta – or in Britain. But there has been little progress. A few yachts, mansions and properties have been seized here and there, but there has been no systematic attempt to identify the wealth of Russians outside Russia and freeze it. It seems to me that many are not interested in that kind of transparency because, well, in the paradises where Russian oligarchs are involved there are also EU and US billionaires. And they all benefit from the current opacity.

-By the way, what difference do you find between an oligarch and a billionaire? In Chile, we have a higher level of inequality and concentration of wealth than in Russia[1], and yet the media that talks about the «Russian oligarchs» without problems, calls our super-rich «millionaires» or «economic elite». So how do we identify the oligarchs, or are all millionaires oligarchs?

-I’m not a fan of the distinction between billionaires and oligarchs, because in reality there is a lot of common ground between Russian, Chilean, and American billionaires. All have benefited enormously from each country’s laws, tax system, property regulation or deregulation, etc… Russian billionaires bought companies at a very cheap price and sold them at a very high price. Many billionaires in the US and other countries also do the same. Billionaires in Russia have very low effective tax rates, sometimes close to 0; and in the US as well. A few months ago a leak showed that Jeff Bezos, Elon Musk, Warren Buffett and many others pay almost zero in taxes. So, there are many, many commonalities and I think that distinction is meaningless.


Credit: Leo Camus

«The power of wealth is even more extreme when it is opaque, and nobody knows who owns what exactly.»


-Going back to the registry, what data should it have? The movement of bank accounts, and shareholdings in companies?

-I think the logic of the real estate registry works well, and you can start from there. For example, who owns the houses in Santiago? The main limitation of the current registries is that they sometimes identify only the shell companies or trusts that nominally have control, so the first step should be to register not the intermediary but the ultimate beneficiary. Then you can add other forms of wealth. The Chilean government issues government bonds, who are the owners? Many bonds are held by financial intermediaries but are ultimately owned by individuals. The same for shares in publicly traded companies, who are the owners of those companies? All countries have a record of at least the large holdings in these companies. In Chile, in fact, there is extensive information available to the tax authorities on the ownership of companies. What needs to be done is to record who owns these assets.

-Suppose the new government in Chile wanted to create an asset registry. What about the wealth that is in tax havens? How could a small country like Chile force tax havens to provide this information?

-The first thing I would say is that a policy like this is more effective if it is carried out with international cooperation and coordination. But, having said that, there are many things that can be done at the local level. For example, most of the wealth of the richest Chilean households is invested in local assets: shares of Chilean companies, Chilean real estate, Chilean bonds. Therefore, creating transparency about the owners of these assets is possible and would be a breakthrough in the measurement of wealth. Now, on wealth abroad, I would say that the authority already receives some information from foreign banks, with the automatic exchange of information that was created in 2017 under the auspices of the OECD. That information is not used very much, or in a systematic way, to measure real wealth. But it is there, somewhere in the computers of the Chilean tax authority, so it could be used for example to quantify real assets. I am not saying that all financial banks in Switzerland, Panama and similar jurisdictions cooperate truthfully and honestly. Some do and some do not. For those that do not, some form of sanction is needed.

-Perhaps it would be necessary for a group of countries in Latin America – say Brazil, Chile and Argentina – to join together to sanction countries that do not want to cooperate.

-Of course, it is easier to do these things collectively, when several countries say: ‘OK if a tax haven resists sending accurate information, we will impose sanctions such as withholding taxes and payments to that country’. But there are things that can be done now. Because the lack of a coalition can be used as an argument to say: ‘we can’t get certain information so we shouldn’t collect any information’. And the truth is that 90% of the relevant information about the rich in Chile can be collected by the Chilean authorities. On the other hand, you have to consider that tax havens or secret havens are very small jurisdictions, sometimes they are not even countries, so the idea that a country like Chile can’t do anything to force the British Virgin Islands or the Cayman Islands to cooperate really doesn’t make sense.

-Economist Lucas Chancel in the presentation of the World Inequality Report 2022 [2] proposes to complement wealth taxes with a discount or an additional tax, depending on whether wealth is invested in green sectors or in polluting sectors. Do you think an asset registry could help environmental policy?

-Yes. The idea is to have wealth tax rates that could vary depending on the types of investments people make. So, if some people invest in green energy and others invest in fossil fuels, they could have different rates. But to do that, you need a lot more information about the types of investments people make, the types of assets they own, and that’s where the registration would help.

THE ENGINE OF PROSPERITY

-You say there is a threat to democracy in extreme wealth. From that, I would like to know what do you have in mind when you think of a billionaire? I’m thinking, for example, of what Greg Mankiw argues in an article: that the extremely wealthy are wealthy because of their intelligence and ability. On the other hand, we have Congresswoman Alexandria Ocasio Cortez who represents many when she says that every billionaire is a political failure. What do you see when you see a billionaire?

-I once asked Greg Mankiw if he believed that the extreme concentration of wealth can be corrosive to republican and democratic institutions, and he said yes. People know that there is a tension between extreme concentration of wealth and the possibility of a well-functioning democracy. It’s a very old idea that was central to the United States, ever since the American Revolution. James Madison, the father of the US Constitution, who remains a hero to Republicans like Greg Mankiw, writes very clearly, in the late 18th century, that the concentration of wealth is corrosive to the Republic; it is as bad as being in a state of war, and that the role of political parties should be to prevent the excessive accumulation of wealth in a few hands. It is an idea that has a lot of common sense.

-I’m not sure it’s common sense in Chile. For a long time the idea expressed by Pinochet has dominated: «you have to take care of the rich so that they give more». The logic is that since they produce the growth, we have to protect them.

-Of course, some people have this belief that the key to economic growth is a handful of very deserving entrepreneurs who have brilliant ideas, who create businesses, and that this is what drives human progress, economic growth, etc. But when you look at the data, the history of the world, that is simply not true. The engine of economic growth is mass access to education and health; it’s cooperation, it’s the quality of institutions and the social trust in them. All of this matters much, much more. All successful growth stories are stimulated by the forces I have described, and it has never been the case that just a handful of billionaires have driven economic growth or progress in any meaningful way. If that were true, there would be an example they could point to, but there is not. So, this ideology that we need a few extremely wealthy individuals to raise living standards is simply not true. The main lesson of economic history is that this is not how the process of economic growth works. Countries become prosperous through the cooperation of millions of well-educated, healthy, and trusting individuals.

On the other hand, the ideology you have described assumes that if you tax the rich, they will radically change their behavior. I think this second element is also a mistake. Look, for example, at Bill Gates: when he created Microsoft in 1975, the corporate tax rate in the US was 48%. The top inheritance tax rate was 77%. The top income tax rate was 70% at the federal level, plus some taxes at the state level. I don’t think he thought, ‘no, I’m not going to create Microsoft because there are too many taxes.’ Today, when you ask entrepreneurs what is important to them in their decision to start a business, they say things like: can I hire well-educated workers? Productive and happy workers? Do I have access to a large market where people have the purchasing power to buy my products? Certain regulations for business also matter. And they mention taxes at the bottom of the list, at number 7 or 8. Taxes are simply never a game-changer in the decision to start a business.

-I would like to problematize the two ideas you raised. First, if we think about Walmart, which today is the largest employer in the United States, one could say that its owners – the Waltons, who are one of the richest families in the country – provide a lot of jobs, so they are quite important to the American economy. On the other hand, it is true that Bill Gates did not have in mind the tax rates he would have to pay when he founded Microsoft, but today, if taxes are raised, wouldn’t he be willing to move to places with lower rates? Maybe then taxes would matter, wouldn’t they?

-On the first point, the fact that the Waltons are shareholders or controllers of Walmart has no implications for the productivity of the business. They could be replaced by other shareholders or pension funds, and it would make no difference. What has influence is Walmart’s CEO. And that is true even when the founders of the business are alive. For example, the fact that Bezos is Amazon’s largest shareholder is not the reason why Amazon is efficient. What matters is who runs the company, and that is very different from who owns the company.

Regarding whether taxes cause people to go to other countries, the problem here is tax competition. And I would like to stress that this competition is not some kind of law of nature. It is a choice that countries make. And they can make other choices. For example, to say, «we are not going to accept tax competition,» and that, if a billionaire leaves Chile, he will still have to continue paying taxes in that country for a number of years, which may depend on the number of years he was a tax resident there. Chile and the United States represent two polar cases in this regard. If you become a multimillionaire in Chile and move, you immediately do not have to pay any more taxes there. The United States is the opposite case. If you’re born there, and two months later you move, you’ll have to pay taxes there until you die because taxes are based on citizenship. What I’m saying is that you could have a middle ground, where you pay taxes depending on the number of years you have tax residency. Because if you have created a great fortune in Chile, that’s great, but we know that all wealth creation is a social process. So, if you benefited from Chilean infrastructure and Chilean workers and all the public goods that were collectively provided in Chile, it is perfectly logical to say that you still have to pay as if you were a resident in Chile. This could be for a number of years and with tax credits to offset the taxes you might pay in your new country, especially if you move to a tax haven.

-In the US, you can renounce your citizenship, and then you no longer pay taxes there.

-That’s true. But there is what is known as an «exit tax» for renouncing citizenship. But I think more powerful than that exit tax is to make the millionaire continue to pay taxes in that country, for a number of years. I insist: tax competition is a political choice. And it is not a choice that has been debated in a transparent and democratic way, to be honest. If we look at international negotiations and the 15% minimum corporate tax, it is a good illustration of the idea that we can choose between competition and cooperation.

EVASION SELLERS

In 2019, Zucman, along with two other researchers, published in the American Economic Review the article Tax Evasion and Inequality, in which they analysed the tax records of Scandinavian countries (Norway, Sweden, and Denmark), the leaks of the HSBC bank (Swiss Leaks) and the Mossac Fonseca law firm (Panama Papers). They discover that the assets and resources hidden in tax havens do not belong to the rich Scandinavians in general but specifically to the super-rich. In other words, it is not the 1% who evade the most, but the group at the top of the distribution: the 0.01%.

This finding contradicts traditional economic models for understanding tax evasion, according to which tax evasion depends on tax rates, the probability of being caught evading and the punishment when caught. The problem is that the $10 million and the $100 million taxpayers face the same rates and are subject to the same surveillance by the authority. Why does evasion soar in the top group?

To understand the problem, the article shifts the focus from the demand to evade (the super-rich), to the supply to evade: law firms and investment banks selling sophisticated schemes that the tax authority fails to detect. These scheme sellers, says Zucman, internalize the cost of eventually being caught evading. And to reduce that cost, they do not offer their services to many clients because serving them would require many employees. There is always the risk of having an ethical employee who leaks the operations to the authority. The way to reduce the risk is to offer these services to the small group of the wealthiest.

This shift in focus to the providers suggests a solution to evasion. Given that these scheme makers make their decision by internalizing the cost of being caught, it seems to researchers that one solution to reduce evasion is to increase that cost to the point where it is no longer business[3]. «If policymakers were systematically willing to drive those who facilitate evasion out of business, then the supply of service would fall and evasion by the wealthiest would fall dramatically,» the authors write in the paper.


Credit: Leo Camus

“Even if you only care about market efficiency, you have to worry about extreme wealth.”


-For you, are services that provide evasion schemes and distort the law linked to extreme wealth?

-Exactly. Whenever there is extreme wealth, there is also a whole wealth defence industry to protect it. Very wealthy people look for ways to minimise taxes; and they also buy media to influence ideology and policy. And they fight against policies that might be bad for their business such as anti-trust laws. That’s what a lot of rich people do everywhere, all the time, and in all times. Well, sometimes people also give their wealth to charities, but the truth is that there is a tension between extreme wealth and two things: the democratic process and the proper functioning of the market economy, which is distorted when some actors have much more power than others. So even if you only care about market efficiency, you have to worry about extreme wealth.

-In that article, you say that since those who provide avoidance services (tax firms, investment banks, etc.) are central to the evasion of the richest then they should be punished much more and so the richest would be left without those mechanisms. That proposal is quite logical. However, it seems to me that this is how the United States dealt with the war on drugs in the 1980s. It thought that the problem was the suppliers and decided to attack the Colombian cartels. And for a while they defeated them, but as demand did not diminish, other suppliers emerged in Mexico. So I wonder if the focus on suppliers is appropriate.

-I think you have to get both things right: regulate supply and demand. One thing that strikes me is that throughout history there have been big changes in tax evasion that, for the most part, originate from changes in social norms that sometimes encourage evasion and sometimes discourage it. To put it another way, governments always choose which markets to allow. Some markets are considered repugnant and are banned. The tax evasion market is one that has sometimes been considered that it should not exist. During some periods it was considered that it should not be legal to sell tools that would allow people to evade taxes, such as shell companies, or the famous Swiss bank accounts. At other times, on the other hand, it has been considered an acceptable market. For example, when you think that the engine of growth is the individual maximising his own utility and you think that any barrier to that is bad, then minimising taxes is good. And a state that thinks that way can let people minimise taxes because, even if it is not legal, it can be thought of as a «force for good», a «force for progress». What I mean by this is that I don’t think you can understand tax evasion well if you forget about supply, who are the economic actors are that help people avoid paying taxes; if you forget how this industry is sometimes regulated and sometimes not. There is a tendency to forget all this and in that article you quote, I wanted to remind you of that. I don’t think that, in most cases, people wake up and want to evade taxes. What happens is that they become very rich and then they start to be targeted by off-shore banks and the industry that creates shell companies in order to minimise tax payments.

– Chile is now discussing the reduction of banking secrecy. What is the importance of reducing banking secrecy in the context of the need for transparency that we have discussed?

-It is very important because what we know today from all the research on tax evasion is that when there is a third party reporting information – and not the taxpayer himself – tax evasion is very low. And vice versa, when there is no independent party, tax evasion tends to be very high. The bank can be that independent third party and report information on interest and dividends earned by its clients. But if there is bank secrecy, that means that it creates possibilities for tax evasion. And here we are talking about tax evasion on financial income, which is concentrated among the wealthy, so maintaining bank secrecy is essentially like saying, «we think the wealthy should be able to evade tax if they want to». That doesn’t sound like a great idea.

TAX REFORM

It is quite clear that extreme concentration of wealth goes hand in hand with extreme inequality. In Chile, however, one still hears the argument that inequality is a problem of envy as the Chicago Boys believed. Or it is claimed that inequality would not be such a serious issue, as it is mistakenly believed to be decreasing.

Recent research by economist Ignacio Flores allows us to see Chilean inequality in a clearer perspective, and to connect it to the problem of the concentration of extreme wealth. Using tax and National Accounts data, among other sources, Flores shows that between 2000 and 2019 the richest 1% took more than 30% of the national income; and that the richest 10% captured just over 60% of the country’s income. Meanwhile, those who earned the least, i.e. the bottom 50%, received just between 6% and 8% of the total income.[4]

This gap, Flores argues, has remained stable for the past 10 years. «The story about the decline of inequality in Chile is an illusion,» he wrote in a chapter of the book Impuestos Justos para el Chile que Viene (Fair Taxes for the Chile to Come). If that doesn’t change, and we return to growth, 60% of everything we grow will continue to go to 10% of the population.

But the difference in income inequality (i.e. what people receive on a monthly basis) is not as great as wealth inequality. To graph the wealth gap between ordinary people and Chile’s super-rich, Flores and Pablo Gutiérrez transformed Chilean fortunes into minimum wages.[5] According to their estimates, there are 35,000 people who have wealth in excess of 5,000 minimum wages. And at the top of the distribution, there are individuals with assets of over 100,000 minimum wages. A person earning the minimum wage today would have had to start saving 8,000 years ago to have that wealth. That is before the pyramids of Egypt were built.

-In Chile we are going to have a new tax reform soon, and it is possible that it will include a wealth tax. You are a promoter of this type of tax. What do you think would be the benefits of its implementation in a country with high inequality like Chile? Some question whether it is not better to tax capital income.

-The main reason why a wealth tax is needed is because it is very easy for very rich individuals to have a lot of wealth and declare little taxable income. That means that today individuals who have the greatest ability to pay taxes can easily pay very little or sometimes zero. And it is not ideal for the richest people in the country to do that. The reason it happens is that when you’re super-rich, you can structure your wealth so that you don’t generate dividends or capital gains. And when they need to buy things, they don’t sell their shares but they can borrow money by putting up their shares as collateral. It’s very easy. To put it another way, there are rich and extremely rich people who don’t have a lot of taxable income. So, since you are never going to be able to tax billionaires correctly on income alone, we need another instrument for a reasonable tax system. Consequently, a wealth tax is the right way to tax billionaires. There is a lot of research in different countries showing that billionaires pay a very low income tax rate of just 2%.

-Do you think wealth taxes are powerful enough to change the concentration of wealth? Some question whether such a tax can make much of a difference.

-That depends on the rate. On the other hand, what a wealth tax fundamentally does is that it tends to make wealth younger. Let’s say you create a business, a very successful start-up and when you’re 30, you become a billionaire. That’s great. When there’s no estate tax, it’s very easy for you to remain a billionaire and the primary owner of the company until you’re 70 or 80 years old. With an estate tax, it becomes more difficult, because every year you have to pay 2%, 3% or some other fraction, of your wealth. This means that the richest people will not always be the same people. That is, you create a successful business, but then you will gradually lose your stake in that business, and other people who might also have great ideas will have the opportunity to change the way the business works. That’s what the wealth tax essentially does.  In the United States, this is already done with the inheritance tax, which is a big wealth tax. The only difference is that the inheritance tax is once in a lifetime, at the time of death, and the question is, is it reasonable to wait until people die to tax them? It makes sense to try something that is more gradual than just a zero tax and then, boom, an inheritance tax.

-The past experience of OECD countries shows that estate taxes have been quite ineffective in raising tax revenues, and some argue that there could be other, more effective reforms to do this. What would be your response to this?

-The first thing I would say is that for this tax to work, you have to make sure that you tax the richest. European wealth taxes didn’t do that. They were not taxes on billionaires. They actually exempted billionaires because they had all sorts of exemptions like, for example, if you owned more than X% of a company. So, in practice, they were taxes on the upper-middle class, i.e., the rich, but not the super-rich. They were like super property taxes. Property taxes are levies on the wealth of the middle class who own a house. European wealth taxes were taxes on people with big houses, and some financial wealth but not big owners of big businesses and fortunes. The kind of tax that is being discussed today in Chile and many other countries is very different.

-Do you think it will increase revenue in a significant way?

-I would say that if they try to tax the richest, if they don’t create exemptions for any kind of asset, if they simply say «we are going to measure the net market value of people’s wealth, and from a certain level, no matter if it’s housing, shares in companies, wealth is going to be taxed», then obviously it’s going to generate a lot of revenue. There are two important reasons. One is that wealth is very large relative to income. In Chile, total household wealth is 4 times total GDP. That means that if you have a tax on total wealth that is only 1%, you will raise 4% of GDP in revenue. Let us now consider that taxes in Chile are in the order of 20% of GDP. So, if you have a 1% tax on wealth, the tax-to-GDP ratio increases from 20% to 24%, which is a lot of additional fiscal resources.

The second reason is that wealth is highly concentrated in Chile, so a large amount of revenue can be raised by exempting 99.9% of the population and focusing on the top 0.1% of the wealth distribution, who own 20-25% of total wealth and having rates that could be higher than the 1% described. We could easily do the calculations. The top 0.1% – one in 1,000 individuals – owns 25% of total wealth. Total wealth in Chile is 4 times the GDP. So 25% of the wealth is 100% of GDP. That is the tax base. Then you choose the rate. With 1%, you get 1% of GDP in revenue. With 2%, you get 2% of GDP in revenue. If the rate is 3%, you get 3% of GDP in revenue. All this in a country where the tax-to-GDP ratio is really low (20%) compared to other OECD countries. The difference would be big, no doubt.

I want to emphasize that wealth taxes are important today because wealth is large compared to income and GDP. Today in Chile, a large amount of revenue comes from VAT, consumption taxes, and indirect taxes. And VAT was created in the 50s and 60s in France and other countries at a time when wealth in relation to GDP was low. The value of the wealth stock was low, and the concentration of wealth was at a historically low level. At that time, there was a desire to encourage savings and the accumulation of wealth because we were in a post-world war context. In 1955 it made sense to say, «there is not much money to raise by taxing wealth, and we want to encourage saving, so let’s tax consumption. Let’s have a VAT». But in 2022, the situation is just the opposite. Today, wealth is very large relative to income and GDP, the concentration of wealth is very high, and inequality is increasing. That is why today, the tax to be promoted is not VAT. The wealth tax is the tax of these times.

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