Welcome to The Rest Is Politics: Leading. With me, Rory Stewart.
And me, Alastair Campbell. Now, a lot of our listeners and viewers seem to like it when we have left-wing economists with big ideas on Leading. We've had Kate Raworth, Yanis Varoufakis, and Gary Stevenson, who ever since has been nagging us to get on our guest today, Gabriel Zucman. He's a professor at Berkeley and the Paris School of Economics. He's best known for his work on exposing tax havens and also for a proposal for a wealth tax, or as he prefers to call it, a minimum income tax guarantee.
Thank you. Thank you so much. Thanks for having me.
Thanks for coming to Paris. And good. So to begin, we're sitting here in a bunch of the École Supérieure, and you are one of the products of this extraordinary French educational system, but also been in Britain, the States. So can you locate first how much you think your thoughts about inequality, billionaires, come from your personal experience, your experience in France, the problems that France is facing, maybe a little glimpse into French politics where the extreme left and the extreme right seem to be doing better than they were a few years ago?
For me, what's been important is I've spent about 10 years in California, in Berkeley, and this has radicalized me a little bit because in the Bay Area of San Francisco, you have extreme wealth. You have the world's top billionaires and you have extreme poverty. Tens of thousands of homeless people. And year after year, I had the impression that this was getting worse and that the Democratic Party in particular was not able to propose some solutions to that problem. And so I've seen the explosion of US inequality, the consequences that this has for politics and for democracy in the US. And I think it's really extreme if you look at the level of plutocratic capture that's happening today in the US. I think even people who were skeptical about the path of the US economy 10 or 15 years ago, none of them could have imagined what's happening today with Trump and how he's governing. So this has encouraged me to work more on these issues. And what I want to emphasize is that the explosion of billionaire wealth is not just in the San Francisco Bay Area. It's a global phenomenon, and in fact, it's probably one of the defining features of the world economy of the last 15 years.
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So, Gabriel, one of the things that has happened in California is that they have now got a tax coming in on billionaires. What do you make of—explain the tax they're bringing in in California? What impact is it going to have? Is this the kind of model you're looking for around the world? Because that's actually a real example, right, of the place you're complaining about and the same response.
So, first of all, as we speak today, it's not yet 100% sure that the California billionaire tax is going to be on the ballot in November, but there's a fair chance. And so, what is it about? It's a proposal to create a one-off, a one-time 5% wealth tax on the wealth of California's billionaires. The billionaires of California, you have about 200, 250 of them. They own wealth equivalent to 50% of California's GDP. That's really an enormous amount of wealth. And if you tax them at only 5%, the state of California could get about a hundred billion dollars in tax revenue. And they want to use that to offset the deep cuts that Trump has made to Medicaid funding, you know, which is a federal program for health insurance for low-income Americans. And so there's just a big hole in the budget of California for healthcare. And so they want to—they need more money. What's interesting is that it's both very big in terms of potential tax revenue, but it's also really tiny relative to the wealth of the billionaires or the explosion of their wealth, because over the last two years their wealth has increased 150%. Right? So you take 5%, absolutely nothing is going to change for them, but it will make a big difference for the state of California, 40 million people.
Can I ask you what you mean by wealth? What are we actually talking about? Are we talking land? Are we talking income? Are we talking property? Are we talking corporation? Are we talking crypto? How do we assess how much wealth an individual has?
So what is wealth? Wealth is the value of everything that you own. Financial assets and non-financial assets, net of debts. So you add up everything. It includes, for billionaires primarily, shares in companies, equity in the businesses that they own. For the super rich, there is sometimes this view that wealth is very complicated. But the reality is that it's quite simple. About half of it, globally and in the UK in particular, corresponds to shares in publicly listed companies that are listed on the stock market. So very clear, observable value. And most of the rest corresponds to shares in big private companies. But because we're talking about billionaires, these are going to be large corporations, not listed on the stock market, but not very complicated to value because we know how to value big companies. We look at how similar businesses that are listed on the stock market are valued by the stock market. And let me just finish by saying that, of course, there is a bit more than that. So, for instance, the billionaires, they have paintings, you know, the Picassos, the yachts, and crypto. All of that exists, but first, it's only a small fraction of their wealth. And second, even those forms of assets are not very hard to value. For instance, if you own a very valuable painting, there's an insurance value. It's insured, and so you can use that as a base for valuation.
But if you're, I don't know, Jeff Bezos, and, you know, we all know the story that he takes no income, he's one of the richest men in the world, he even got a tax credit for one of his kids, which is utterly obscene, everybody can agree with that. But at the same time, are we seriously saying that somebody like him is going to have to, in his tax returns, list all his paintings, list all his cars, list all his watches? I just want to get a feeling of how you come to a view that this is a person's wealth. How we assess that?
So, first of all, you have to avoid a mistake that was done in the past by all the countries that used to have wealth taxes, which is to let people self-report. You know, if you let people self-report on their wealth, some of them are going to report honestly, but there's also going to be sometimes the temptation to forget about some assets or to undervalue others. And so the better way to proceed is to have the government send a pre-populated wealth tax return based on the information that the government, HMRC in the UK, already collects. And the government has access to a lot of data on wealth. There's the land registry for real estate. There is now an automatic exchange of bank information between countries. So HMRC actually receives data on the wealth held by Britons in foreign banks. There's been for a long time an automatic exchange of information between domestic financial institutions and the tax authority. So the right way to proceed, in my view, is HMRC should use its own information, send a pre-populated return saying, okay, based on what we know and based on the assessment that we've made of the value of the businesses that you own, we think that your wealth is X, let's say a billion pounds. And of course, taxpayers then could make corrections and amendments, and that's okay. But the opening bid, if you want, has to be made by the tax administration. So when we're talking about these billionaires, probably the most dramatic, world-changing example is what's happening in California.
And a lot of this is the story about American tech and hypergrowth, right? This is Elon Musk sets up Tesla. He starts with shares which are worth $1, they're now worth $170. Or he launches SpaceX. Or Jeff Bezos starts out of his father-in-law's backyard and now he's built Amazon, right? And it's a very, very interesting, very rapid kind of wealth. I mean, these guys 10, 15 years ago had much, much less money. And the reason that Elon Musk is a trillionaire, whereas two weeks ago I think he was worth 600 billion, is because he just did this SpaceX IPO where suddenly he's like projecting he's going to land people on Mars, he's going to have data centers in the sky, etc. So you're analyzing as an economist something which is also technological and cultural, right? It's a very, very strange new development in the way that wealth is generated and the rapidity with which it's generated.
I think it's part of the story, to be sure, the rise of tech and—
In California, you talk pretty big.
Yes. But if you look at the world—
But let's focus on 200 people in California.
Yeah. Well, sure. I mean, in California, a lot of the wealth of billionaires corresponds to wealth that belongs to tech people. And most of them are founders, co-founders, early investors in tech startups.
Absolutely. Yeah. But I think that it's not relevant what sector they operate in. What are the individual merits or demerits of the people involved? Taxation, wealth taxation is not about people. It's not about their characters. It's about money. It's about budget. It's about how we organize our collective spending. And so the fact that they've been operating in this or that industry, I think, should not matter. They've all benefited from government spending.
In many, many ways, like SpaceX would not be possible without all the investments. But there's two different moves, right? On the one hand, you say it doesn't matter how they make their money, and the next moment you say, oh, they made the money with government subsidy. So it sounds—
All billionaires, you know, like all wealth creation—
So it's one or the other, right? Either you're saying I don't care how they made their money, or you're saying they didn't make their money in the right way because they made it with subsidies.
What I say is that the tax rate should not be decided based on the individual trajectories or merits of the individuals involved. So you have good people among billionaires, you have less good people, and it just doesn't matter at all.
Is the risk, though, that this is a classic economist position? All other things being equal, here are these rational people. It doesn't matter who they are. It doesn't matter what industry they're in. We're just going to treat them all the same, right? But of course, in reality, these things go wrong precisely because the incentives of individuals, the incentives of particular sectors matter. So the real question, I suppose, therefore, I can pose it to you is not how do we tax yesterday's billionaires, you know, how do we tax the billionaires of the future? And what are the incentive structures which are going to determine, let's say, you're setting up a big tech company, whether you are going to put yourself in France where Gabriel is going to tax you, or whether you're going to put yourself in Texas where somebody's not going to tax you.
Okay. So let's talk about these two issues, which is one, would the tax on wealth discourage people from innovating, from becoming entrepreneurs? And second, this issue of international mobility. So on the first issue, I've spent 10 years in California. I was in the faculty at Berkeley. I've taught literally thousands of students who then went to launch a business, work in tech, and so on. And I've defended lots of projects for billionaire taxation, including in the US. And not once have I ever had a student come to my office and tell me, 'Oh, look, professor, I'm very excited about the prospect of creating my company. I want to become an entrepreneur, but I'm really worried about the amount of tax that I would have to pay if I become a billionaire or a centimillionaire.' It's just such an unlikely event. You know, we're talking about a 0.0001% chance that you are going to have such success that nobody at age 20, 25, you know, thinks about this. It's just not relevant. And we're talking also about, in the case of the California billionaire tax, a 5% one-off tax on their wealth, which the wealth of billionaires has been multiplied by a factor of 30 over the last 30 years. So we're talking about really low tax rates for people who are extremely wealthy. It's not going to discourage anyone from innovating, from creating a startup. You know, what really matters to encourage, to foster innovation is not to guarantee a 0% tax rate on billionaires, but it's to invest in education, in higher education, in public infrastructure, in healthcare, in all these core engines of economic growth. This is how the UK and France and the US have become prosperous countries, is because they've chosen over the course of the 20th century to make those massive public investments which have lifted productivity by a factor of 10.
On mobility, it's an issue that needs to be taken seriously. But what's really important to understand is that tax competition is not a law of nature like gravity. Sometimes people think that you tax billionaires in the UK and they'll move to Dubai, and it's like a law of nature. It's not like that. It's a policy choice. It's something that we can choose to accept or that we can choose to fight. So, for instance, the way it works in the US is that if you have US citizenship, you have to pay taxes to the US no matter where you live until you die. So you can move to Dubai. It makes no difference. You still have to file a tax return and pay income tax in the US. That's one model. So there's no incentive to move abroad for tax reasons. What other countries do, including the UK, is the opposite extreme in some sense. Or in France, what we do is we say, okay, someone who has spent all their life in the UK and now decides to move abroad, then immediately the UK stops taxing that person. I think that's not reasonable. And my proposal is to strike a kind of middle ground where if you've lived for a long time in the UK and you became very rich in the UK and now you move to another country, then the UK keeps taxing you for a number of years, perhaps not until you die like in the US, but let's say for 10 years.
But if you look at where all the billionaires are, this is going to require—even if I do agree with you about the horrors of inequality—it's going to require a level of political will that I'm not sure in our democratic systems exists. You're going to have to get the US government buying in at some point. China, I was in Hong Kong recently. Hong Kong has just overtaken Switzerland as the biggest wealth hub in the world. Communist China, Europe, mentioned UK, France. So this is a great idea to have, but how do you make it happen?
Yeah, you don't need an international agreement to make it work. Any country on its own can say, first, we are going to tax our billionaires if they pay too little tax today, because my proposal is not just a straight wealth tax that comes in addition to whatever you pay.
And you don't think if one country did that, you don't accept Rory's argument that a lot of them would actually just say, we'll take our money elsewhere? Or doesn't that matter?
So any country can say, first, we're going to tax our billionaires, and second, if they move, we'll keep taxing them, period. We don't need China or the US to agree to any of that. Any country unilaterally on its own can decide to do it. And so then the question is, okay, is there ever going to be the political will in any country, whether it's France or the UK, to actually do that alone?
And I think there is, because there has been in the past. If you look at the creation of the progressive income tax, it didn't involve any kind of international agreement. It's different countries at roughly the same time at the end of the 19th century, early 20th century that said, look, we're going to do things differently. For centuries, we've had very unfair tax systems, mostly based on consumption, flat income tax rates. And then they introduced a progressive income tax in the UK, the famous People's Budget of 1909, in France in 1914, in the US in 1913. And then the income tax became very progressive during the course of the 20th century. There was a lot of experimentation, but what I mean is that it was a huge political battle, the People's Budget, the creation of progressive income tax. These are always complicated battles, but at the end of the day, the forces of democracy prevailed. And even though at the beginning of the 20th century you had many people predicting all sorts of disasters if we were to ever have a progressive income tax, one century after that, everybody recognizes that by far, by and large, it's a big success. Except—and I just end with that—except that the billionaires have not yet entered into the system. They are mostly not paying any significant amount of income tax. That's a problem.
And as an introduction, I kind of defined you as a left-wing economist, but is there not a sense that the biggest beneficiaries of this could be the very, very wealthy people just short of being billionaires? Because you've got this label billionaire and you've got this title, but then you've got an awful lot of people just below that who are going to be very, very wealthy. So is it progressive? Is this left or right?
That's a good question. So first of all, the proposal, just to make sure everybody understands, is to create a minimum tax for people who have more than 100 million pounds or dollars or euros in wealth. So if you have more than 100 million pounds, you should be paying a minimum amount of tax each and every year. That's the basic proposal. You've mentioned the case of Jeff Bezos. Today we have super rich people who pay zero.
Yeah, I think all of us, we agree that it's not acceptable.
Apart from them. Hey, sure. But almost everybody on that planet agrees that if you are extremely wealthy, you should pay a minimum amount of tax each year. Number one. Number two is, okay, if we agree, let's create that principle. And now how do we make it effective? If we express the minimum tax as a fraction of income, it does not work because the whole problem is that those super rich individuals, they find ways to report very little income or sometimes no income. Jeff Bezos paid himself no wage as CEO of Amazon. Amazon didn't distribute any dividends. He didn't sell any shares. So he didn't realize any capital gains. So his taxable income was indeed very low. But his true ability to pay taxes is, of course, very high. So if we want an effective minimum tax on the super rich, the minimum has to be expressed not as a fraction of income but as a fraction of wealth, which is much harder.
So you're saying starting from the bottom working up rather than from the top working down.
So what I'm saying is that if you have more than 100 million pounds, you should pay a minimum each and every year equal to 2% of your wealth. It means that if you are already paying in income tax more than 2% of your wealth, you're not affected. You're good. No extra tax for you. But if you pay less than that, you will have to pay the difference to reach this minimum of 2%. And so a couple of remarks. First of all, why 2%? The rate has not been chosen randomly. 2% is the rate that would ensure that the super rich would pay as much tax relative to their income as the average taxpayer.
Basically, if on average the rate of return on wealth for those rich people is around 6% of their wealth, so you do a little bit of arithmetic. If you tax their wealth at 2% and they earn a return of 6% on their wealth, that's equivalent on average to an income tax of 33%, which is what the upper middle class broadly speaking pays in tax. So that's 2%. Then why 100 million? It's because all of that is based on a recent research effort, international research effort, that has established that above 100 million, roughly speaking, the income tax vanishes, in particular because the super rich above that level use holding companies in a quasi-systematic manner to shelter their income from taxation. So to put it differently, people who have 1 million, 5 million, even 10 million pounds in wealth, typically they will pay income tax, and typically the amount of personal tax that they pay relative to their wealth is more than 2%. So for them, no, you could lower the threshold, but it wouldn't make any difference, right? Because they're already above 2%. It's really for the super rich that there is a need to create this floor because they avoid the income tax today. And let me just finish by mentioning that it's for those super rich individuals that the rise of inequality has been the most striking. You know that wealth inequality has increased in the UK, but the wealth of billionaires has exploded. Let me just mention one number. You look at the Sunday Times Rich List in 1989, the first year of the ranking. The 200 wealthiest families in the UK owned wealth equivalent to 5% of the UK's GDP. Meaning if they had spent their wealth, they could have bought the equivalent of 5% of all the goods and services produced in a given year in the UK. Today the number is 20%. Okay? So you have 200 families who could buy, if they spent all their money, all their wealth, they could buy a fifth of everything that's produced in a given year in the UK.
Gabriel, there are so many moves you're making here, right? So many moves, so many assumptions you're making. I'm sorry. Right. Your statement that the best way to generate productivity is investment in public education and infrastructure. Look at the competitive relationship between California, the UK, and Europe over the last 10, 15 years. The time when these guys made all the money. It would be ridiculous to say that the US made that money because of investment in public education infrastructure. In fact, their investment in public education infrastructure is much worse than Europe on almost every indicator. Right? The kind of productivity investments you're talking about, Western Europe is far better than the United States. And if that was the main driver of this growth, you would expect UK, French, German growth to be much, much stronger than the US. Where do these billionaires you're talking about in the UK, where did they come from? Where did they actually make their money? Right? So when John Fredriksen moves from Sweden to the United Kingdom, the Gini coefficient in Britain goes in the wrong direction because this massive Swedish billionaire has moved to Britain, right? He departs the country again, the Gini coefficient goes in a different direction. Has equality improved in Britain? Has anyone's lives got worse when he moves here? Has anyone's lives got worse? Now, and which brings me to the bigger question, right? What are the risks? What are the costs? What are the benefits of this proposal? So presumably you acknowledge there are some risks, and your major lever is taxation. So there is some risk. You know, you think very little, but there must be some risk that some people will move. There must be some risk that your idea that you can chase them for 10 or 15 years to get their money is not going to work. There will be a legal challenge. You're not an expert on UK law or human rights law. Okay? You're not an expert on the UK budgetary process. But it seems to me perfectly possible that the Chancellor of the Exchequer announces on such and such a date, we're going to chase people for 10 or 15 years, they leave. So there's a risk. Okay. So then what is the benefit? What is the revenue that you propose to generate from this change? Okay. And what is the problem you're trying to solve? Are you trying to solve housing? Are you trying to solve income inequality? Are you trying to get Britain to be more productive? And does the problem you're trying to solve justify this risk and cost-benefit calculation?
Okay, that's a lot of questions. So what is the problem we're trying to solve? It's the problem that has come into light very recently when several dozen researchers have been working in partnership with tax administrations in different countries to establish how much tax the super rich pay and how does this compare to the rest of the population.
Okay. And we're talking about here the UK, not the US. So just to explain very carefully. So in the UK, the basic problem is that they are largely paying capital gains tax, which is 24%.
No, that's not the basic—that's not the problem. Okay. The problem in all countries, including the UK, is that the super rich find ways to report very little or sometimes no income. So the problem is not the rate that you apply to that income. The problem is that they report no or very little income. And how do they do that? It's because they put their wealth, which mostly corresponds to shares in companies, into holding companies, personal holding corporations. And those holding companies earn income, primarily dividends or capital gains, free from the individual income tax. They don't pay income tax on that income.
They pay corporation tax.
The holding companies don't pay corporation tax.
What sort of tax do they pay?
That's the whole problem.
You're saying holding companies in the United Kingdom pay no tax.
True. If a holding company receives dividend income from a business that it owns, then it's not going to pay tax on that dividend income.
But if it's the same in France, it's the same all across the EU.
It's the same everywhere, with just one exception, which is the US, which had those debates in the 1930s when in 1933 the New York Times revealed that J.P. Morgan had paid no income tax in 1931 and 1932. Public outrage, there was an inquiry.
J.P. Morgan, the individual?
The individual, yes, which was one of the largest fortunes of the time. And so what they found out is that there was systematic use of personal holding companies to avoid the individual income tax. But that was during the New Deal, and the Americans at the time, they said, that's not okay. That's not how the income tax should work. And so they created what is known as the personal holding company tax, which is a tax specifically on holding companies to discourage people from doing this type of tax avoidance. And so ever since 1937 in the US, the US billionaires, they've not been able to do this kind of tax avoidance. They have found other ways. But in the UK, in France, in all other countries where we've had studies, this problem that the US fixed in 1937 still exists today. You put your wealth in the holding company and boom, as long as the money stays in the holding company, you don't have income tax to pay. The consequence of that, because this is really important. What problem are we trying to solve? The consequence of that is that if you look at what's the effective tax rate of the working class, all tax included, VAT, payroll taxes, everything is going to be, depending on the country, around 30, 40, 50% of their income. For the middle class, the effective tax rate, all tax included, increases a little bit. For the upper middle class, it increases a little bit. And for billionaires, it collapses. It collapses to 25% in France, to less than 20%, and so on.
Let me just say, listen, I and most reasonable people will think that is utterly unacceptable. I guess the question is whether this is the way to address that. So I think with some of these corporations, particularly if you take—
What are you trying to address? You're just trying to address the fact they're not paying tax, or there's some social problem you're trying to fix?
So let me just finish. This is a very important question. So what problem are we trying to fix? It is this regressivity problem that I'm trying to fix.
It's a basic question of equality before the law. The most conservative interpretation that you can make of the principle of equality before the tax law is that wealthier people shouldn't be allowed to pay less tax relative to their income than the rest.
Okay. But listen, let me just make a different point. The point I was going to make is that it goes back to political will. When Gordon Brown was chancellor and prime minister, he was rightly, in my view, utterly obsessed with this issue of tax havens. Okay? And I think tried very, very hard in lots of different ways to try to get around them. You've studied the tax havens. Is there not something difficult about the assumption that, first of all, governments are going to buy into this, which they have to do, but also that then you won't just have more and more people finding ways around it unless actually you do get rid of any kind of competitiveness around tax? Because the truth is right now a lot of these people that are paying literally zero tax, who I despise and you despise and lots of other people do, but what they're doing is using legitimate means to put money into countries. You know, the Cayman Islands does exist. The Channel Islands—
Do exist. You know, these places are there. So unless we're actually... Luxembourg exists. Unless we're... and how do you do that within the European Union?
