Saturday, 23 May 2015

Whither Syriza’s Wealth Tax?

Lost amidst the tumultuous coverage of Eurogroup meetings, negotiations, leaked documents and denials, the new Greek government’s plans for tax reform are slowly taking shape and are due to be announced in the early summer of 2015. One flagship fiscal policy, announced as far back as the Thessaloniki programme, is a wealth tax. We don't know much about it, but we do know that a) it will replace ENFIA b) it will not apply to primary residences c) it is likely to be levied almost exclusively against property, although other assets might follow d) it will most likely be a net wealth tax, i.e. levied against people's equity in their belongings.

This won’t be the first attempt by Greek governments to tax wealth of course  - the hated ENFIA may have actually hastened the downfall of the previous government, prompting the kind of people that core Syriza voters had once derided as ‘νοικοκυραίοι’ to join them in the party’s ranks.

Ironically, no more than a year ago, the Bundesbank itself proposed a wealth tax (as a one-off, high impact measure) for troubled Eurozone countries. The IMF also considered a recurring wealth tax (see pg 39 here), again only to suggest that one-off levies on wealth might work better. Cyprus, of course, got a brief taste of this medicine before moving on to a more traditional depositor bail-in. 

Towards a new Wealth Tax: Taking stock

According to the ECB’s Household Consumption and Finances Survey, it took a net 331,800 in assets to put a Greek household in the top 10% of the wealth distribution (see Table A2 here) in 2009. While the threshold must have fallen very significantly since then, some of the fall in e.g. property wealth should be reversed when the economy begins to recover. So, without access to more recent figures, I will assume that it would take a threshold of EUR300,000 to capture the top 10% of Greek households by wealth. Not a bad place to start counting ‘the rich’ if you’re looking to balance left-wing legitimacy with a decent revenue, and also a number often referred to in the past as Syriza's threshold for wealth taxation.

Next is the question of how much wealth these people have. The ECB’s 2009 figures aren’t much help here, but Credit Suisse’s 2014 estimate of D10 wealth in Greece (which allows for a fat tail uncaptured by surveys) is at 56% of ca. $1 trillion, nearly half of which is in turn owned by the top 1% (pp. 125-6 here). The tax base potentially covered by our wealth tax system is therefore around EUR494 billion gross in today’s rates, or EUR462 billion net (assuming the top 10%’s ratio of gross to net wealth has not changed since 2009). 

[Note: I started writing this post in January; 'today's rates' unfortunately refer to late January]

This is the top line and it’s huge. Like an entrepreneur mulling over their business plan, the new Greek government might be tempted to think – if we can get just a little bit of that…
Well we can get a little. We know because others have tried for years. Wealth taxes are far from new, but were a dying breed in the run-up to the crisis, with more and more OECD countries abandoning them from the mid-90s onwards. Here's why.

No miracles

First, even when the tax base is wealth, taxes are paid out of income, and wealth taxes are thus constrained to some extent by the income of the wealthy. In some parts of the world (well, Germany) there is even a legal precedent of courts capping wealth tax as a share of actual income. In this context, the main function of wealth taxes is to marginally improve the fit between households’ tax liabilities and their tax-paying capacity, often by using wealth as a proxy for undeclared income. In countries like Greece, where high earners are notorious for tax avoidance, the appeal is undeniable. But large numbers of households, especially olders ones, can be asset-rich (or asset-comfortable) and cash-poor. A tragic example was one of the high-profile Greek suicides of 2012, a carer who twice insisted in his suicide note that he had ‘ample wealth, but no cash.’

Second, it's hard to pin down accurate valuations of wealth. Assets acquired in the (often remote) past may have appreciated enormously in value but, in the absence of a market sale, never been revalued accordingly. Taxpayers have no incentive to obtain independent valuations, especially under a wealth tax regime, But even if they wanted to obtain one, this will not always be possible since most of the assets that constitute wealth are highly illiquid and non-standardised. To name one example, the Spanish wealth tax system was known to consistently under-value property prices by around 70%.

Third, wealth taxes distort markets in significant ways as taxpayers seek to minimise liabilities; taxpayers can sell property and rent it back, lease yachts instead of owning outright, use equity release schemes to reduce their net equity in properties, and, of course, move their deposits (if counted as wealth) to another country.  This last option makes it hard for countries like Greece to levy any taxes on deposits unless they have the option of also implementing capital controls. I, for one, see no coincidence in the fact that Greek deposit flight accelerated following a series of news stories in January and early February claiming that Syriza was planning to tax deposits. While I cannot vouch for the quality of the sources cited by the press at the time, this plan chimed with a set of 2013 proposals made by one E. Tsakalotos, better known today as our Much More Agreeable Lead Negotiator with the Troika Institutions.

Finally, wealth taxes cost a lot to administer; they require a lot of high-quality information to run, when most states struggle to get even the basics right. Greece is struggling to get a register of property ownership together, let alone take stock of other assets.

So how much could we raise?

The tax yield from such exercises has varied across countries but as a rule it has been surprisingly small.  In Sweden, with a hundred years’ experience of wealth taxation and a vastly different tax culture to Greece’s, the wealth tax never raised more than 0.4% of GDP before being abolished. In France, it never raised more than 0.25% of GDP and in Spain it never raised more than 0.22% in recent history. The European Commission’s recent review of international wealth taxation found that revenues from net wealth taxes throughout Europe didn’t seem to exceed 0.5% of GDP in any country – about EUR1bn if applied to Greece. Historically, only small and very wealthy countries able to exercise capital controls seem to have achieved more – Switzerland probably owns the record at about 3.5% of GDP.

These examples are not entirely typical of what the Greek government could expect. Wealth taxes in other EU countries have generally focused on a narrower share of the population than the Greek government envisages and none have been implemented in the kind of struggle for survival the Greek government finds itself in. When the IMF used ECB data to calculate what might be raised on a recurring basis from a tax on the top 10%, they arrived at an estimate of around 1% of GDP across the EU (see pg 39 here). The closest equivalent to Greece might still turn out to be the case of Iceland, which reintroduced a net wealth tax in 2010, and originally set it to sunset out in 2014. We know exactly how much this raised – ca 0.9% to 1% of GDP in 2013 and 2014, despite the added support of capital controls.

That's the top-down approach. But a bottom-up estimate is also possible. My guess is that the pain threshold for such a tax is to cause taxpayers to pay as much as they would do if they had declared all income, but also not sell assets or eat into deposits, and also maintain their target ratio of liquid assets to income. If anyone is willing to try the math on this one, please leave a comment.

It’s hard to get to the liquid assets or the undeclared income of the top wealth decile in Greece, but extrapolating from the ECB’s figures for the four quartiles of the distribution back in 2009, I believe that their liquid assets might be around 3 times the group’s quarterly permanent household income (see Table 2 here for the data underlying my extrapolation). Additionally, we have estimates of unreported income by wealth quantiles from the groundbreaking work of Artavanis et al, who find that the top 10% by wealth under-report their income by ca. 50% (see Fig 1 here). That unreported income would also be part of the final tax base.

And how much would all of that that be?  Well even assuming the top 10% by wealth are also the top 10% by income (which they are definitely not) their liquid assets would not exceed 19% of Greece’s total annual household income, or ca. EUR42bn on 2013 figures, and their annual undeclared income would be around EUR28bn.

If pressed, I would say that an annual yield double that of the ENFIA income would be the best-case scenario in the medium-term, and on a very favourable set of assumptions. On balance, the risks are weighed to the downside, suggesting the wealth tax would have to be broadened, meeting fierce resistance along the way. But seriously, that's just me sticking my finger in the air. If you're willing to do the math, get in touch. 

[1] Unlike other estimates, I am tempted to use the 2009 ratios from the ECB household consumption and wealth study, because I suspect wealthier households really do target liquid assets as a share of their annual income.


  1. Sir,
    the post is very well taken. Two questions remains: I see the point that illiquid assets are hard to value. Why not concentrate on liquid assets such as bank deposits first? And if you do so, why concentrate on assets in Greece? Germany, Switzerland, France, UK, US....would certainly help identifying assets held by Greek nationals and imposing the relevant tax rates. That would be even easier because these countries have a viable tax admin.

    1. My estimates, per CS's methodology, are of Greeks' assets worldwide. Power law approximations are used to estimate the wealth of the top 1% who, as a rule, don't answer surveys, but do make it into Rich Lists from Forbes and others.

      More generally, remember that liquid assets are a (very) small subset of total wealth. As Piketty shows, it's property that chiefly accounts for the 1%'s accumulation of wealth. And deposits are never as much as people think. Take Switzerland. When Swissleaks gave us HSBC's Greek deposits in Switzerland, the figures were underwhelming - $2.6bn over a period of three years; of which half a billion with a single person. http://www.keeptalkinggreece.com/2015/02/09/swissleaks-hsbc-files-show-86-more-greeks-on-lagarde-list/

      A lot of money, to be sure; and this is only one bank; and it's all worth investigating as a matter of principle. But enough to plug a hole in the Greek state's finances? Nowhere near, not even if the state could confiscate all of it; in cases of money laundering, the Greek state may not be the aggrieved party at all. In cases of tax evasion, the Greek state would not have a claim to any money other than taxes due, plus interest. Not to mention, this illicit stash took probably decades to build up; we couldn't count on Greece's super-rich to rebuild it each year so we can build a credible tax based out of their loot.

      I think there's a place for wealth taxes - especially on land and property, where even libertarians can see a good economic rationale. But their most valuable function would be to reduce rent-seeking and promote productive investment, not to finance the state. There really is a reason why no state has ever been able to rely on wealth taxes for much tax revenue.


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