Recently millionaires from different countries signed a petition under the name “Millionaire for Humanity” demanding their respective governments to raise taxes on them to help with the coronavirus pandemic. More than 80 individuals have signed the letter, and most signatories belong to the developed nations like the US, UK, and Germany. One of the key aspects of the petition is that taxes can only create a huge impact against charitable contributions, no matter how generous these contributions are. It might be a rare and historic moment to witness wealthy individuals quoting “Tax us, Tax us, Tax us” to fund the social sector like health, education, and security. The phrase “rebalance our world through wealth tax” seems like a unique moment of truth for the wealthy to play their part towards humanity.
But is the voluntary action enough to counter the state’s inaction to tax the wealthy? A few individuals’ voluntary actions are a drop in the ocean that might not even make a dent to make all wealthy accountable?Wealthy do indeed pay proportionate taxes according to their state laws in many parts of the world. But the bitter truth is that there are also increased tax avoidance cases by the wealthy, which the Paradise Papers, Panama Papers, and other evidence show. That is why there is a rigorous debate on taxing the rich even more.
According to Oxfam’s 2020 report world’s 2,153 dollar billionaires had more wealth than 4.6 billion people or 60% of the world population in 2019. Even in the aftermath of COVID-19 there has been no change in the millionaire’s status quo who actually saw their wealth grow exponentially. According to Forbes magazine report, 10 billionaires gained $51.3 billion or Rs 3.9 lakh crore (at exchange rate of Rs 76) in just a week between April 2 and 9 when the global economy was almost shut (except for a few essentials) and millions were losing their incomes and jobs.They did this through the stock market. These billionaires included Jeff Bezos, Mark Zuckerberg, Warren Buffett, Elon Musk, Bill Gates, and Mukesh Ambani.
Thus the paper analyses two main issues in relation to the petition. Firstly, why similar actions were not taken by the wealthy in the developing nations, with focus on India? Secondly, will a voluntary compliance mechanism via a petition resolve the ongoing issue of tax evasion by the wealthy?
- Why there is no similar petition in developing countries?
The petition seems to appear as a global movement, but in reality, it is a mere representative of the few wealthy individuals residing in developed economies. The less participation and debate amongst the developing countries on taxing the rich can be understood in terms of their societal and cultural background. In India, it is easier to project it as a home to the poorest, but it is also a home for some of the world’s wealthiest people. In this context, it is essential to understand how the wealthier population’s nature changed significantly since Independence and how a favourable tax system helped them to grow.
1.1. From Inherited wealth to private enterprise:
When the British left, a handful of business families and dynastic royalties were in charge of key economic industries. These dynastic royalties had amassed and inherited great fortunes over time due to their close ties to the colonial administration. Although there was poverty amongst the general population, the most lavish lifestyles were only enjoyed by the princely classes, some business houses and large zamindars (landlords).
Primarily the inherited wealth was the primary source of wealth amongst the wealthier population.
However, between 1961 and 1986, India’s notorious macroeconomic plight undermined a progressive effort to reduce the incumbent rich’s size and importance. Low economic growth was accompanied by a sharp reduction of the real value of wealth held by the top 0.1%. The backdrop for this decline was itself rooted in the integration of India when the government quickly took steps to abolish inherited wealth amongst the super-rich royalty. Hence inflation, progressive taxation, and nationalization that characterized the late 1960s and 1970s punished the outdated rentier class and expropriated much-existing wealth.
In the 1990s, domestic and external liberalization happened in India, resulting in the deregulation of taxation and private investment. This led to a rapid increase in stock market capitalization relative to GDP. In fact, given the tremendous rise in stock market capitalization, it seems possible that wealth concentration in India may have surpassed its pre-1970 levels in recent decades. This transformative wealth dynamics of the 1960s and 1970s are crucial to understanding how the elite class, once populated by inherited wealth, is now made up of private enterprises.
However, the rise of the new private enterprise did not address income inequality, only to make the rich richer and the poor more miserable. According to Oxfam’s January 2020 report ‘Time to Care‘ said, in 2019, the wealth of top 1% Indians went up by 46% while that of the bottom 50% by 3%. In 2019, the top 1% Indians held 42.5% of national wealth, which is, more than 4 times the wealth of 953 million people constituting the bottom 70%. The bottom 50% held just 2.5% of national wealth. According to the Credit Suisse’s ‘Global Wealth Report of 2019‘, there were 7,59,000 dollar millionaires in India 2019, up from 725,000 in 2018 and 34,000 in 2010. This shows that even as a developing economy we do not have a dearth of wealthy people who are unable to participate in the petition.
1.2. How the tax system works favourably for the wealthy?
In developing countries, the governments’ primary focus is on resource mobilization, which dictates their tax system. This is due to the unequal income distribution. However, the tax system is also designed in such a way that makes it harder to tax the rich. This is because wealthy taxpayers’ political and economic power often prevents the government from developing fiscal reforms to increase their tax burdens.
Moreover, there are high personal exemptions and the plethora of other exemptions and deductions that benefit those with high incomes (for example, the exemption of capital gains from tax, generous deductions for medical and educational expenses, the low taxation of financial income). India has been an active recipient of FDI for decades. As a result, it results in lower effective tax rates for MNCs.
Simultaneously, the government keeps on slashing the corporate income tax rate during every budget, providing strong incentives for taxpayers to choose the corporate form of doing business for purely tax reasons. For instance, the Indian government slashed corporate tax to 22% (without exemptions) for domestic companies in September 2019, bringing the effective rate to 25.17% (with surcharge and cess). Such a move happened when the economy had nose-dived for several consecutive quarters.
According to the IMF, the combination of tax incentives and low corporate tax rates leads to the following:
- Increased incidences of tax evasion due to the ease with which multinationals seem able to avoid tax, combined with the three-decade-long decline in corporate tax rates, undermines both tax revenue and faith in the fairness of the overall tax system and
- the current situation is especially harmful to low-income countries, depriving them of much-needed revenue to help them achieve higher economic growth, reduce poverty and meet the 2030 Sustainable Development Goals.
Hence, it can be observed that wealthy individuals are provided with a plethora of tax incentives in a developing economy to prevent capital flight. However, this does not translate into high tax morale for these individuals due to increased tax evasion incidences. Now is the time for the wealthy to take part in the petition to share responsibility in rebuilding the economy.
- Will the Petition be effective in achieving fair taxation by the wealthy?
2.1. Assessing the problem of tax evasion by the wealthy
Empirical data has shown (e.g., E. Hofmann, Voracek, Bock,& Kirchler, 2017b), that the motivation to engage in tax avoidance and evasion increases with wealth. Recent studies indicate that tax evasion is directly proportional to wealth, with the top 0.01% of the wealth distribution (i.e., households with more than $40 million in net wealth) evades almost 30% of their wealth and income tax versus 3% by taxpayers overall (Altstaeder, Johannesen, & Zucman, 2017). With the aim to minimize their taxes, it is easier for the wealthy to hire tax agents who are skilled in devising ways to achieve that(Sakurai & Braithwaite, 2001).
Tax avoidance is a huge issue that amounts to $240 billion every year (Rs 18.24 lakh crore), according to OECD-G20’s anti-tax avoidance initiative, ‘Action Plan on Base Erosion and Profit Shifting’ (BEPS). Recent data by Fair Tax Mark shows that Facebook, Google and four other US tech giants, described as the Silicon Six (others being Netflix, Amazon, Microsoft, and Apple) had avoided paying $100 billion tax (Rs 760,000 crore) between 2010 and 2019. Due to tax evasion, according to 2019 IMF study, the non-OECD countries are losing 1.3% of their GDP or $200 billion of revenue every year while the OECD countries about 1% of GDP or close to $450 billion.
Nonetheless, the blame cannot be squarely put on the wealthy for causing tax evasion. It is the legal, political, and economic context of national tax loopholes which not only give the wealthy many more opportunities to avoid taxes than the average citizen but might also create an ideal environment that legitimises aggressive tax avoidance behaviour.
2.2. How the petition will help in combating massive tax evasion problem?
It can be said that the petition is an example of committed motivation by the wealthy which drives them to pay taxes because of a felt moral duty(Gangl et al., 2015) or due to emotional stress, caused by anticipated guilt or shame (Blaufus, Bob, Otto, & Wolf, 2017). However before delving into the question whether such an initiative will be effective to combat tax evasion in the long run, it is important to understand the social psychological process that motivates the wealthy to either pay or evade taxes.
The wealthy can easily identify and compare themselves with other wealthy individuals as a result of pychological process in relation to belonging to a particular group. As a result they imitate not only lifestyles but also tax behviours out of comparison and competition, because one does not want to fall behind in the financial race (Mols & Jetten, 2017).For instance, if all wealthy friends move money to offshore tax havens, then the individual will also more likely do that.
Also, wealthy individuals do acquire a heightened sense of self-esteem, freedom, and perceived control, which increases the willingness to resist anything that hinders freedom (Brehm, 1966). Taxes on the wealthy is a classical case where the rich find it as an attack on their personal freedom for which they look for ways to fight against it. In fact, experimental research shows that coercive fines and audits increase taxpayer reactance more than less coercive attempts by the tax authorities (Gangl, Pfabigan, Lamm, Kirchler, & Hofmann, 2017). Thus, when faced with coercive form of taxation wealthier individuals will be motivated to employ more resources (compared to the average taxpayers) to escape this situation. This might make the classical coercive attempts to increase the tax honesty less effective.
In such a scenario, the voluntary form of tax compliance might appear as the ultimate solution to fight against reactance. Such a form of compliance comes with trust in the tax system, and thus, people accept their tax obligations without threatening audits and fines. However, state measures like suspending fines and audits or tax amnesties, which gives leeway to rich taxpayers to repatriate their money from tax havens without being fined, also show no long‐term positive effect (Alm & Beck, 1993; Toro, Story, Hartnett, Russell, & Van‐Driessche, 2017). Thus, it is important to combine voluntary and coercive tax measures to ensure fair taxation with a sense of tax honesty on the part of the wealthy individuals.
In view of the COVID-19 it is apparent that the petition by the few wealthy individuals brings in a wave of hope towards achieving fair taxation for the sake of humanity. However, the outreach is still not global, with a participation of a fraction of wealthy individuals from a few developed economies.Thus, there is a need to ensure the huge participation of wealthy people, not only from developing economies but those involved in tax evasion.
As discussed in the article, tax-related decisions of the wealthy are different from average taxpayers due to social psychological differences of belonging to a particular community. So a unique approach must be followed to motivate the wealthier population to pay their share of taxes.
3.1. Possible solutions:
There are many ways to motivate the wealthy, either in developed or in developing countries, to contribute more taxes to the benefit of society. It is true that mere public plea to join the campaign will not attract the attention of majority of wealthy individuals. On the other hand, coercive audit or fines to ensure fair taxation also does not help much towards the cause. For example, a fine of 18.8 million Euros imposed on Portugal’s football superstar Cristiano Ronaldo did not diminish the fame and positive image associated with the player.
One possible solution to influence the tax decisions of the wealthy is to combine coercive and voluntary state measures by publicly naming and shaming the wealthy individuals who resist to be part of the global campaign or pay their fair share of taxes. Thus, if such accusations on famous wealthy individuals like Chief Executive Officers or politicians violate ordinary citizens’ tax morale, these latter might start questioning the reasons for their tax honesty. For instance, after Greece published a blacklist of over 4,000 citizens who owed tax money to the state (Aswestopoulos, 2012), it experienced a decline in the shadow economy’s size from 25.4% in 2010 to 22.0% in 2016 (Schneider, 2016). This way, identifying evaders publicly may act as punishment and a deterrent from engaging in aggressive tax avoidance. However, it is equally true that shaming needs active public support and media coverage, without which the debate towards fair taxation will lose its grip. So the time is ripe for citizens to join their hands in the global movement towards fair tax and compel the wealthy to be accountable.
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