Dr. Rafael Wildauer | University of Greenwich Interview given to Ms. Maria Louisa Vafiadaki
-Kindly introduce yourself and please talk to us about your research and scholarly interests.
I am a macroeconomist currently at the University of Greenwich, where I have been working for 4 years. One of my key areas of interest is the distribution of wealth, how it is distributed in the European Union and how we can measure it more accurately because it turns out that there are some hurdles to overcome. I am interested in these questions because at the heart, it all comes down to distribution of power and wealth. It tells you something about who owns and controls the economy and this has important implications for taxation etc.
-In what ways would a Wealth Tax address the problem of inequality and create a more just & sustainable society?
Wealth is what we understand as a slow-moving variable. It takes decades for changes in the distribution and accumulation of wealth to manifest. Also, policy interventions to reduce inequalities are often focused on policies which take a long time to feed through into the wealth distribution such as education. In contrast a wealth tax has the potential to reduce the concentration of wealth much faster. This is because a progressive wealth tax simply redistribute from those who have a lot to those who have less. A wealth tax is key in reducing these inequalities in a fair way.
-What are the advantages of a Wealth Tax and who benefits the most?
I see 3 advantages which are interesting about a wealth tax. The first one is that it allows you to raise public revenues without slowing down the economy. Compare that to the VAT for example. If you increase that sharply, then suddenly 90% of the population will have much less money to spend.
Secondly, it allows you to precisely target those who are most able to contribute to the greater good of society by paying higher taxes. The third interesting feature is that it can be very effective to reduce inequalities.
-Except for Europe, could this Wealth Tax also be applied in the US, Middle East or Asia?
In general, it can be applicable. The 2 elements for a successful implementation are credible enforcement and a certain infrastructure on the side of the tax authorities. On the one hand, tax authorities need resources in terms of employees and other tools to credibly enforce it. If the chances of being caught for tax evasion are low, no one will pay the tax.
The second element is information exchange between tax authorities and financial institutions because this makes it easier to track and monitor personal wealth. These elements can be introduced in Europe, the US and Asia. It depends of course on the political will, but I would say that they can applied there.
-In your latest report, you mention 4 different tax scenarios: a flat tax, a mildly progressive tax, a strongly progressive and a highly progressive model. Can you briefly explain each scenario and its implications and tell us which one you think is the most just?
Firstly we have a baseline flat tax rate. This is the minimum version of a wealth tax and what that would do is raise revenues for initiatives like poverty reduction or fighting climate change. It probably won’t do much to reduce wealth inequality because we know from the data that rich people are very good at turning money into more money, which means that the fortunes of wealthy people grow very quickly. Therefore, a wealth tax with a low 1% tax rate would not really do anything to reduce existing inequalities.
The other end of the spectrum is the highly progressive tax. This model introduces a wealth cap because the highest tax rate in this model is 90% on wealth holdings which are about 10.000 times the average wealth. This would mean that you would need to have an annual return of at least 90% to stay at that level. In effect, this model would introduce a maximum wealth of about 2 billion Euros.
What we are touching on with the models in our report is the debate about “can someone be too rich”? This hasn’t been discussed at all in public or the media, but I think there is a case to be made that too much wealth exists. At some point, extreme accumulation of wealth becomes incompatible with democracy. If you have vast amounts of wealth and affect the public opinion, then the fundamental principle of democracy “one person, one vote” starts to crumble.
-The richest 1% of all households holds almost 1/3 of Europe’s wealth. How is that possible and how have the financial crisis and the pandemic stimulated this oligopoly in the last two decades?
In the data we see that there was a change in the long-term trend of wealth concentration around the 1980s, when it started to increase. Wealth concentration has increased roughly 40 years in countries like the US for example and a key reason for that is because over these last 40 years, a narrative emerged that companies’ goal is to maximize profit. The focus on shareholder maximization become the main doctrine and everything else of secondary importance. The thinking was if companies were allowed to maximize their profits, everyone would benefit.
It turned that not everyone benefited, but mainly, a small group of people who owned the companies. The other reason is that there is a positive feedback mechanism. If the concentration of wealth increases, it means you suddenly have a lot of money with which you will try to affect laws and regulations in a way which allows you to accumulate even faster.
-Historically, would you say that wealth inequality has always existed? Can you give us examples of countries which have succeeded in minimizing the gap between the rich and the poor.
This is a difficult question, because we don’t have very good historical data. The concentration of wealth was much worse and more extreme at the beginning of the 20th century, especially in the US and UK. Then, it started to equalize in the first half of the 20th century, the Golden age of capitalism, where wages were increasing for a big part of the population. In parallel, concentration of wealth went down. But for most countries we simply don’t have long historical time series to answer this question.
-One could think that the wealth gap is only natural, depending on factors such as work output, external factors or for instance luck. What is your response to such a claim?
First of all, individual factors are definitely there and play a role and I don’t think that the discussion about a wealth tax is denying the idea that individual effort or characteristics play a role in how well you do. You are responsible for your own success to some extent.
Where the disconnect starts between “hard work” and wealth, is when we look at the proportion and the extent of wealth inequality. The amount of wealth concentration has nothing to do with any of such characteristics. In Europe, we have a median level of net wealth of 90.000 Euros. We could say that a typical European household has a net wealth of 90.000 Euros. One of the richest people in Austria, the co-owner of Red Bull, has a net wealth of around 9 billion. 9 billion is 100.000 times more than 90.000 euros.
Do we really think that a person is 100.000 times more clever than the median European person and works 100.000 times harder than the median person? I don’t think so. It doesn’t make any sense. It is not reasonable to assume that one person can replace 90.000 average European citizens.
Wealth concentration is completely out of proportion which brings us to the idea of introducing some kind of maximum wealth, simply because we cannot justify billionaires with personal characteristics. A person cannot work 100.000 times harder, than a “normal worker”.
-What are the interlinkages between a Wealth Tax and Sustainable Development?
There is a direct and indirect one. The direct one is that there is a genuine and general concern about inequality in the world and a wealth tax can reduce these inequalities.
The indirect link can be a very effective way of raising additional government revenues to be used to achieve sustainable development goals i.e. fighting climate change, fighting poverty.
-What is the strongest argument to convince someone that this is a sustainable model ?
I think the strongest argument is the example I mentioned with the comparison of the median to a billionaire household. The wealth gap cannot be justified by differences in how hard someone works or how clever one is, so taxing these vast amounts for sustainable actions in society is a very sensible thing to do. Even if you think that if you work harder, you should make more, even if you have a maximum cap of 2 billion, there is still lots of room to be rich.
-Why does the concept of Wealth Tax remains an idea rather than a practice? What are the obstacles for its application and what measures should be taken to actually apply it?
There are two main obstacles. On the one hand, the people who would be paying it are very powerful and have very little interest in paying it. There is a small minority who sees some of the merits, but the vast majority of rich people has no interest in paying a wealth tax.
On the other hand, there is the narrative of shareholder maximization, where the idea was that taxing wealth is a bad thing for everyone. Wealth taxes are then framed as “bad for the economy” and suddenly ordinary people think such a tax will harm them.
More on Dr. Rafael Wildauer’s profile and research:
https://www.gre.ac.uk/people/rep/faculty-of-business/rafael-wildauer#
Some of Dr. Wildauer’s latest papers:
A European Wealth Tax for a Fair and Green Recovery – Average wealth for EU 22 countries- 2021
A European wealth tax for a fair and green recovery- 2021
https://gala.gre.ac.uk/id/eprint/31926/
Policy Brief: A European Wealth Tax