Taxing the Rich: Erope's Cry for Help to Finance Green Transition

Europe's green investment gap

The IPCC published its special report on limiting global warming to 1.5 Celsius in October 2018, concluding that meeting this goal would need global CO2 emissions reaching net zero by 2050. Despite the large volume of predicted investment requirements, these estimates are likely to understate the real requirements of the EU's 1.5 C climate policy route. 

First of all, the EU's climate strategy is centered on attaining net zero emissions by 2050. This misses the fact that the IPCC's special report on reducing global warming to 1.5 C  defined a 2050 net zero objective as a worldwide average. Given huge variations in countries' economic, technical, and social capabilities, the world's richest regions must decarbonize quicker than the rest of the globe, including Europe. The second reason why the EU's present investment forecasts are too low is because they provide no room for error. The Fit for 55 initiative strives for a precise landing and net zero emissions by 2050. This approach disregards the inherent uncertainty in both the highly complex foundations and potentially non-linear trends of global warming, and the interdependencies that define present economic systems. 

Fundamentally, to contribute credibly to the global 1.5 C objective, the European Union must increase its efforts and ambitions. A serious effort entails putting in place the necessary green infrastructure faster and on a larger scale than is currently anticipated. To a considerable extent, funding these infrastructure projects would require public money, and policymakers should consider how to cover the ensuing investment gap, at least partially. Thus the Europeans came up with the wealth tax policy to offset these investment gaps. 

'Unconventional' but now encouraged

Hence, why is it difficult to find studies regarding the use of wealth taxes as a tool to increase funding for this global situation? This can be explained by the long-standing consequence of the neoclassical growth model, which argues that the optimal capital tax rate, which includes wealth and capital income taxes, should be zero. These conclusions are based on models that assume an equal distribution of wealth based on labor income and an endlessly elastic supply of capital in relation to the tax rate (Atkinson et al, 1976). However, the rise in conditional and unconditional wealth inequality over the last few decades has prompted a slew of publications proposing positive optimal tax rates even in a neoclassical context after these assumptions are relaxed. This is also supported by OECD's calls to urge its member countries to employ capital taxes to increase income without jeopardizing fragile economies in the aftermath of the 2009 financial crisis or even the pandemic. Furthermore, a recommendation reiterated by the IMF in 2021 advocated for the use of wealth taxes to raise public income and address historical or currently emerging disparities. 

A European Solution? Current Verdict

As a national level is highly unlikely, by moving to the European level, the supporters of a wealth tax can bypass the criticism that individual nations' firms are being weakened in European economic competition. This factor is undoubtedly what has prompted France's Ministry of Economics to keep the idea of a European wealth tax on the table. If the European Citizens' Initiative receives the required amount of signatures, advocates of the wealth tax will be able to mobilize European public opinion. Public opinion appears to favor such a move in many nations, including Germany. Apparently, their opinion is also backed by recent studies.

According to a recent study, household wealth in the EU22 is disproportionately concentrated among the wealthiest households: the richest 1% own 32% of total net worth, while the poorest half of all households own only roughly 4.5% (Kapeller et al, 2023). This suggests that the wealthiest households have a greater power than previously thought to close the EU's green investment gap. A wealth tax that exempts all save the richest 1% or 3% of households can be justified not just by their ability to pay, but also by the reality that wealthy households have bigger carbon footprints.

Furthermore, many believe that wealth taxes are still fair since they can diminish the current concentration of wealth. As a result, they may be an important instrument for preserving public support for the challenging transition to a society with low resource intensity and carbon neutrality. Altogether, the infrastructure needed to establish and enforce a European wealth tax, most notably complete beneficial ownership registers, would be a powerful instrument for combating tax evasion, and illegal financial flows in general. With those criteria upheld, findings indicate that a progressive European wealth tax with high exemption ceilings of 1 to 2 million adopted at the European level could be an effective instrument for closing the EU's green investment gap.

Feasible?