How to tax billionaires

 

"Abstract

The Supreme Court is about to rule in a case in which the plaintiffs claim that a one-off levy on foreign investments in 2017 was illegal because it taxed their unrealised gains. In America they could start by ending the rule that lets inheritors reset the clock for capital-gains each time someone dies. If heirs paid estate tax on this fair value, they should not also pay tax on any further capital gains.

Full Text

Editor’s note (June 20th 2024): The Supreme Court has ruled in Moore v United States, upholding the tax at issue (the “mandatory repatriation tax”). The court declined to weigh in on the constitutionality of a tax on unrealised gains.

THE RICH are different from other people. They have more money and, in most places, they pay much less tax. Going by one broad definition of income that combines consumption and someone’s change in net worth, America’s best-heeled pay just a few cents on every dollar of their fortunes. Lately, those fortunes have ballooned, thanks to a soaring stockmarket. One study found that unrealised capital gains account for $6trn of the $11trn in wealth held by the richest Americans. Since 2023, as the artificial-intelligence frenzy has fuelled demand for both Nvidia’s GPUs and its shares, the chipmaker’s founder, Jensen Huang, made more than $100bn. But until he sells some of his stocks, all that money is off-limits to the taxman.

Cash-strapped governments want to get their hands on a slice of these riches. Next year Australia will start taxing unrealised gains in employee pension-fund accounts with balances of more than A$3m ($2m). As part of his re-election campaign, President Joe Biden is promising to find $500bn over ten years for social programmes by charging a 25% tax on the unrealised capital gains of individuals who, like Mr Huang and 10,000 other Americans, are worth $100m or more.

It is easy to understand why the world’s non-multimillionaires may want to soak the very rich. It is equally easy to grasp the appeal for governments, which the wealthy are playing for fools by coming up with clever ways to live in the lap of luxury without ever realising any capital gains.

One of these manoeuvres in America is to buy assets, offer these as collateral for loans and roll over the loans until their death. At that point any capital gains accrued over the owner’s lifetime are zeroed out and the clock starts anew for their heirs, who then themselves “buy, borrow and die”, as this (perfectly legal) device is known.

However, taxing unrealised gains is complex and wrongheaded. It is also unnecessary. A similar end could be met with much less controversial means.

Taxes should be simple to administer and collect. Ideally, they should also raise revenue while distorting behaviour as little as possible. Taxing unrealised gains fails on each of these counts. Calculating someone’s net worth is nightmarishly complicated even once, at their death, let alone every year. America’s Internal Revenue Service took 12 years to put a value on Michael Jackson’s estate. France, Sweden and a few other European countries that have tried to levy wealth taxes have abandoned their efforts after generating lots of administrative headaches but little actual revenue.

Taxing unrealised gains would also cause wild swings in the liabilities of people who own volatile assets, including Mr Huang and his Nvidia shares. Mr Biden’s proposal, which assesses the tax over five years, smooths out some of this volatility. But some taxpayers would still fail to get a rebate for their unrealised losses. That could discourage angel investors and other risk-takers from backing promising ventures whose stratospheric valuations could suddenly collapse, and which can be hard to price. In America taxing unrealised gains may also be unconstitutional. The Supreme Court is about to rule in a case in which the plaintiffs claim that a one-off levy on foreign investments in 2017 was illegal because it taxed their unrealised gains. Even if the justices issue a narrow ruling that leaves the principle intact, Mr Biden’s idea will be challenged.

What, then, are the tax authorities to do? In America they could start by ending the rule that lets inheritors reset the clock for capital-gains each time someone dies. This provision of the tax code, called “step-up in basis”, was introduced in 1921, five years after estate taxes, which are assessed on the market value of assets at the owner’s death. The goal was to avoid double taxation. If heirs paid estate tax on this fair value, they should not also pay tax on any further capital gains.

This rationale looks flimsy now that the biggest estates are built not on earned income, which would have been taxed throughout an estate-builder’s life, but on assets’ appreciation, which was not. Heirs who get rich thanks to their benefactor’s buy, borrow and die are therefore treated very differently from those who inherit a fortune amassed out of taxed income.

Scrapping step-up in basis could yield perhaps a quarter of the $500bn that Mr Biden hopes to get from his wealth tax, at a far lower administrative cost. Taxing capital gains at death would raise the same again. He could realise much of the rest by closing other loopholes, notably the “carried interest” provision which lets buy-out barons pay capital-gains tax rather than (usually higher) income tax on their private-equity firms’ investment profits. Going after unrealised gains is easy to understand and hence good politics. But it is bad economics." [1]

1.  How to tax billionaires. The Economist; London Vol. 451, Iss. 9402,  (Jun 22, 2024): 13, 14.

 

China threatens German car manufacturers

"Chinese media are suggesting a 25 percent tariff for large combustion engine cars in the trade dispute with the USA and the EU. That would hit German brands hard. Other things are also being targeted.

 

So far, the Chinese reaction to the renewed trade dispute with the USA and the EU has been quite cautious. The tariffs announced by American President Joe Biden last week were met with criticism in Beijing. But there have been few concrete countermeasures so far. Only the Chinese Ministry of Commerce announced an anti-dumping investigation against some chemical products from the USA, the EU, Japan and Taiwan at the weekend, which could, however, take up to a year and a half.

 

But now Beijing is gradually filling its toolbox publicly. These include concrete proposals as well as vague threats directed against both the United States and the EU. Shortly before the EU elections, the Commission announced the results of its investigation into China's subsidies for electric cars. The Commission has also launched investigations into Chinese companies that have won tenders in Europe but may have received subsidies at home.

 

China has made it clear that it could react with tariffs itself. While the EU is targeting modern Chinese electric cars, the People's Republic is targeting cars with particularly large combustion engines, which are not popular among climate activists in Europe. According to the Chinese Chamber of Commerce in the EU, China could impose tariffs of up to 25 percent on sedans and SUVs with engines larger than 2.5 liters.

 

Around 250,000 vehicles are likely to be affected

 

The chamber referred to an interview in the Chinese state newspaper "Global Times" with Liu Bin, a Chinese car expert who was also involved in China's car legislation. He brings the step into play as a reaction to the measures taken by the EU and the USA, but also presents it as a climate protection instrument. According to Liu, the measure would also be in line with the rules of the World Trade Organization. According to Chinese customs data, around 250,000 vehicles were affected by the tariffs last year, around a third of all cars imported into China.

 

The threat is aimed directly at Germany. "The luxury models with large engines are mainly built in Germany," says Fabian Brandt, automotive consultant and partner at the management consultancy Oliver Wyman. This refers to the Mercedes S-Class, the BMW 7 Series or the high-engined series from BMW M or Mercedes AMG. He therefore says: "This hurts German manufacturers."

 

Airbus mentioned by name

 

The People's Republic's response is not limited to the automotive sector, however. The anti-dumping investigation by the Ministry of Commerce is about "co-polymerized paraformaldehyde". According to the ministry, this can partially replace some metallic materials and is used in car parts, electrical devices, industrial machinery or medical products.

 

Other threats that state media placed on Chinese social media are more vague. An account belonging to Chinese state television said that China had sufficient countermeasures if Europe continued to act so "obstinately" against Chinese companies. The article was prominently picked up by some state and party media. Europe itself pays high subsidies in various sectors, such as agriculture, it said. The EU is heavily dependent on the Chinese market for the export of wine and dairy products, a lawyer was quoted as saying. "The EU subsidies and dumping practices have caused considerable damage to industries in China."

 

The Airbus group, whose subsidies the USA has long complained about and which relies heavily on China, is also mentioned by name. "The EU is also dependent on the Chinese market in many other areas, such as aviation," it said. China had already launched an anti-dumping investigation into brandy from the EU, which mainly affects French companies." [1]

 

If the EU itself lives in a glass house, then the EU should stop throwing stones.

 

1. China droht deutschen Autoherstellern. Frankfurter Allgemeine Zeitung (online) Frankfurter Allgemeine Zeitung GmbH. May 22, 2024.

Kinija grasina Vokietijos automobilių gamintojams

„Kinijos žiniasklaida prekybos ginče su JAV ir ES kelia 25 procentų tarifą dideliems vidaus degimo varikliais varomiems automobiliams. Tai skaudžiai atsilieptų Vokietijos prekių ženklams. Taip pat taikosi ir į kitus.

 

Iki šiol Kinijos reakcija į naujai įsiplieskusį prekybos ginčą su JAV ir ES buvo gana atsargi. Tarifai, kuriuos praėjusią savaitę paskelbė Amerikos prezidentas Joe Bidenas, Pekine sulaukė kritikos. Tačiau iki šiol beveik nebuvo konkrečių atsakomųjų priemonių. Tik Kinijos prekybos ministerija savaitgalį paskelbė apie kai kurių chemijos produktų iš JAV, ES, Japonijos ir Taivano antidempingo tyrimą, kuris gali užtrukti iki pusantrų metų.

 

Dabar Pekinas pamažu pildo savo įrankių dėžę viešai. Tai apima konkrečius pasiūlymus ir neaiškius grasinimus, nukreiptus tiek prieš JAV, tiek prieš ES. Prieš pat ES rinkimus, Komisija paskelbė savo tyrimo dėl Kinijos elektromobilių subsidijų rezultatus. Komisija taip pat pradėjo tyrimus dėl Kinijos įmonių, kurios laimėjo konkursus Europoje, bet galėjo gauti subsidijas jų šalyje.

 

Kinija aiškiai nurodo, kad ji pati galėtų atsakyti tarifais. Kol ES taikosi į modernius kiniškus elektromobilius, Liaudies Respublika – į automobilius su ypač dideliais vidaus degimo varikliais, kurie nėra visuotinai populiarūs net tarp klimato gynėjų Europoje. Kinijos prekybos rūmų ES duomenimis, sedanams ir visureigiams su didesniais, nei 2,5 litro varikliais Kinija gali įvesti iki 25 procentų tarifus.

 

Tikriausiai, nukentėtų apie 250 000 transporto priemonių

 

Rūmai nurodė interviu Kinijos valstybiniame laikraštyje „Global Times“ su Kinijos automobilių ekspertu Liu Binu, kuris taip pat dalyvavo Kinijos automobilių teisės aktuose. Tai reiškia, kad tai yra reakcija į ES ir JAV priemones, bet taip pat pristatoma, kaip klimato apsaugos priemonė, Liu teigimu, priemonė taip pat atitiktų Pasaulio prekybos organizacijos taisykles. Kinijos muitinės duomenimis, pernai nuo tarifų nukentėjo apie 250 000 transporto priemonių, ty maždaug trečdalis visų į Kiniją importuotų automobilių.

 

Grasinimas nukreiptas tiesiai į Vokietiją. „Aukštesnės klasės modeliai su dideliais varikliais daugiausia gaminami Vokietijoje“, – sako Fabianas Brandtas, automobilių konsultantas ir vadybos konsultacijų bendrovės „Oliver Wyman“ partneris. Tai reiškia, pavyzdžiui, Mercedes S klasę, 7 serijos BMW arba BMW M arba Mercedes AMG didelio variklio seriją. Štai kodėl jis sako: „Tai kenkia Vokietijos gamintojams“.

 

Airbus minimas vardu

 

Tačiau Liaudies Respublikos atsakas neapsiriboja automobilių sektoriumi. Prekybos departamento antidempingo tyrimas susijęs su „kopolimerizuotu paraformaldehidu“. Ministerijos teigimu, tai gali iš dalies pakeisti kai kurias metalines medžiagas ir naudojama automobilių dalyse, elektros prietaisuose, pramonės mašinose ir medicinos prietaisuose.

 

Kiti valstybinės žiniasklaidos grasinimai Kinijos socialinėje žiniasklaidoje yra neaiškūs. Kinijos valstybinei televizijai priklausančioje paskyroje rašoma, kad Kinija turi pakankamai atsakomųjų priemonių, jei Europa ir toliau „atkakliai“ veiks prieš Kinijos įmones. Straipsnis buvo aiškiai rodomas kai kuriose valstybinėse ir partinėse žiniasklaidos priemonėse. Jame rašoma, kad pati Europa įvairiuose sektoriuose, pavyzdžiui, žemės ūkyje, moka dideles subsidijas. Cituojamas teisininkas, sakęs, kad ES yra labai priklausoma nuo Kinijos vyno ir pieno produktų eksporto rinkos. „ES subsidijos ir dempingo praktika padarė didelę žalą Kinijos pramonės šakoms“.

 

Taip pat vardu minima „Airbus Group“, kurios subsidijomis JAV jau seniai skundžiasi ir kuri labai priklauso nuo Kinijos. „ES taip pat priklausoma nuo Kinijos rinkos daugelyje kitų sričių, pavyzdžiui, aviacijos“, – sakoma jame. Kinija anksčiau buvo inicijavusi antidempingo tyrimą dėl brendžio iš ES, kuris pirmiausia palietė Prancūzijos bendroves.“ [1]

 

Jei pati ES gyvena stikliniame name, tai ES vertėtų nustoti mėtyti akmenis. 

1. China droht deutschen Autoherstellern. Frankfurter Allgemeine Zeitung (online) Frankfurter Allgemeine Zeitung GmbH. May 22, 2024.