Taxing the superrich: challenges of a fair tax system

Over the past decades, many developed countries have experienced considerable increases in income and wealth inequality, led by an extraordinary concentration among the very richest swath of households. This has focused policy attention on the superrich. Various political and economic arguments for at least partially offsetting this rise in inequality have been put forward. In particular, politicians have called for increasing the tax burden on rich households, both in the form of higher top rates for existing income taxes as well as new tax levies targeting the superrich. Most prominently, the idea of introducing an annual wealth tax has recently gained attention in the United States. This Public Paper provides an overview of the tax situation the superrich currently face and evaluates various reform proposals. We emphasize that the incomes of the superrich are qualitatively different from others. Some are “superstars,” for whom small differences in talent are magnified into much larger earnings differences, while others work in winner-take-all markets, meaning that their effort to climb the ladder of success reduces the returns to others. Moreover, the discussion about tax rates must be accompanied by attention to the tax base, with a special focus on capital gains, which comprise a large fraction of the taxable income of the superrich. We also review the pros and cons of wealth taxes versus alternative policies that achieve similar objectives. While a dozen OECD countries levied wealth taxes in the recent past, only three retain them at present. Only Switzerland raises a similar fraction of revenue with its wealth tax as the recent U.S. proposals, therefore serving as a useful example