"For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle," proclaimed Churchill as the crowd cheered for the man recognized as the UK's greatest prime minister.Â
Even after more than 100 years, the Europeans still could learn a thing or two from Churchill's powerful oration in front of the town hall in Malmesbury. For the last few decades, Europe has been considered as the pioneer of the transition to sustainable practices through numerous studies on renewable energy as a direct output of the Paris Agreement. However, due to its rising costs and waves of resource nationalism within economic giants like the US and China, the European Union is starting to be left behind in this economic race to address climate change. While 18% of European citizens on average are expecting Europe to become a world leader in electric vehicle production in the next ten years, 46% think it will be China instead, according to a recent European Investment Bank survey. As a result, desperate calls for a wealth tax to finance the green transition are gradually gaining traction in Europe, with a variety of initiatives from various political movements putting the subject back on both the political and economic agenda. Can taxing the rich close the green investment gap? Will such fiscal tool be a wasted effort like Churchill's famous words? It turns out that by examining the neoclassical growth model as well as past taxation systems following the wealth distribution in Europe, we might be able to determine the potential outcome of such policy.
Potential gamechanger?
In a September French legislative report, Jean-Paul Mattei of President Emmanuel Macron's ruling majority, the MoDem group, talked favorably of such a levy to finance the ecological transition. Early this summer, Social Democrat MEP Aurore Lalucq successfully requested for a "European citizens' initiative" from the European Commission. If a million signatures are collected in at least seven nations within a year, it might lead to the creation of a European directive imposing an "ecological and social wealth tax" on the 1% richest households.
A research study commissioned by the European Parliament's Green Group examined the potential consequences of such policy. It discovered that a European tax on the 0.5% wealthiest households would generate an outstanding 213 billion per year. This is all the more astonishing given the virtual disappearance of wealth taxes within EU member states. Only Spain will have one in 2023, with a threshold of 700,000 and rates varying by autonomous community.Â
A disappearance in the engines of Europe
One of French President Emmanuel Macron's first actions as country leader was to repeal the impt de solidarit sur la fortune (ISF), a "solidarity tax" on wealth imposed by Franois Mitterand's government in 1981. Based on the ISF regulations, individuals with a net worth of more than 1.3m (1.14m) were taxed a rate ranging from 0.5% to 1.50% (on assets worth more than 10m). While it may have aided social unity in France, it resulted in an exodus of France's wealthiest. As seen in figure 1 from New World Health, more than 12,000 millionaires fled France in 2016. Between 2000 and 2016, the country lost more than 60,000 millionaires, according to the report. When these people fled, France lost not just the wealth tax revenue, but also all other revenue sources, such as income tax and VAT.
Macron then replaced it with the IFI, a tax on property wealth, to patch the budgetary deficit. Despite the additional tax, the adjustment cut income significantly: the ISF brought in 4 billion to the public coffers in 2017, but only 2.35 billion in 2022. The impact of the adjustment on lowering the tax exile rate or boosting the country's competitiveness has yet to be determined.
Looking into North-Central Europe, a wealth tax remains part of Germany's Basic Law (which serves as the country's constitution), although currently suspended. In 1995, the court ordered Kohl's government to modify the property values used to calculate the wealth tax as property was taxed less heavily than financial assets. As the Kohl administration decided not to do so, the tax was automatically suspended -- but not abolished -- on January 1, 1997.
Due to the same reasons why Macron abolished the ISF, a wealth tax at the national level for European engines like Germany and France are highly unlikely to make a return. Economy minister Bruno Le Maire stated that a comeback for the ISF would lead to an exile of the wealthiest in a context of tax competition between states, a flight of capital and thus job losses -- repeating 2016. Therefore, a return at national level is highly improbable for wealth taxes to fund the green transition. To understand its implications, we first should understand the condition of green investments in Europe.Â
