Centi-Millionaires on the Move as Tax Agenda Evolves

2024 has seen a constant stream of challenging news for the most footloose of taxpayers, the centi-millionaires. From the UK introducing stricter restrictions on its historically generous non-domicile rules, through snap French elections with results that created mayhem, and on to Italy suddenly doubling its flat tax, tax on the wealthy is a talking point everywhere you look.

Even if only at the proposal stage, such as in the case of Switzerland, where a political party that is not in power is musing that a much higher inheritance tax might be ‘fair’, it seems that taxing the rich is grabbing the headlines.

Of course, it’s not a simple matter. Global inequality is a centuries-old issue, and governments the world over have electorates keen for better public services, which require something or someone to pay for them.

Wealth taxes and their consequences

More millionaires and centi-millionaires are on the move than ever before, and as one set of countries competes to load their spending needs onto them, another set lays out the welcome mat, recognizing that a wealthy resident is likely to generate more in sales taxes than many taxpayers do in income taxes. There are many ways to raise tax revenues, and income taxes are only one of them.

Wealth taxes are a hot topic, but most countries that have tried them in the past have seen what a blunt instrument they are. The fact that France abolished its wealth tax in 2018 as unworkable hasn’t prevented it from being a preferred policy in the manifestos of some parties in 2024.  And Norway’s experience of increasing its wealth tax soon led to an exodus of its ultra-rich, illustrating the high cost of wealth tax. The perception that people don’t pay their ‘fair share’ continues to be blind to the difference between income and unrealized capital gain. 

Recent efforts to impost a global tax on billionaires at the G20 level seem to have subsided again, but such ideas have a habit of resurfacing. Many said that a global minimum corporate tax rate was impossible and unachievable 15 years ago, but that didn’t stop it from becoming a reality.

Many countries don’t tax inheritances, and the question of whether inherited wealth should be ‘allowed’ or not does recur. Other countries might have an inheritance tax, an estate tax, or a gift tax, and countries such as the UK are looking at foreign trusts to bring them into the inheritance tax net. Taxation can quickly become very complicated.

All eyes are on the US elections

Meanwhile in the USA, a major election is playing out in an environment that is relatively silent in terms of tax and spend plans, although Democratic presidential nominee Kamala Harris recently endorsed the tax increases proposed by President Biden in his fiscal year 2025 budget, one of which is a 25% minimum tax on total income, including so-called “unrealized gains” or asset growth exceeding USD 100 million.

Any proposal that deviates too far from accepted international tax principles of only taxing realized income would lead to people looking very carefully at the US as a place to invest in. Taxing an unrealized gain on the way up looks great, but the optics of handing billionaires tax refunds in the following year when those unrealized gains reverse, look terrible. Handled poorly, this can look like a bailout for the rich when their stock prices fall. Nobody will remember it’s just giving them back what they paid in last year. There are many good reasons why other countries don’t do this.

The complexities of global wealth taxation

Tax rises might seem like a straightforward solution, but care needs to be exercised — a significant increase in the taxation of capital gains might drive the shareholder offshore completely and eradicate all the tax on the gain rather than doubling the proceeds. Very soon a handful of individuals packing their bags and leaving could have a tax impact in the millions or tens of millions — or more.

In a cash-strapped world there is no easy fix, but we should not lose sight of the fact that a small percentage of a big number is still more than a high percentage of zero. 

While some countries look at migration as an issue expressed in terms of people in small boats crossing the channel, if we turn our necks and look upwards, the small planes heading in the opposite direction may be just as significant.