Upon COVID-19: Time to tax the super-rich

May 25, 2020

by Sonny Africa

The Philippines has never had a wealth tax. For as long as there has been a tax system in the country, taxes have been collected largely from what people pay for what they consume or from what they earn.

Since the pandemic exploded at the start of the year, much has been said about the unprecedented impacts on people’s health and the economy. It should also prompt a rethinking of the country’s accustomed sources of tax revenues – and a wealth tax would be historic.

This helps to shift the tax burden away from regressive consumption taxes towards the handful of families with fortunes in the billions or even hundreds of billions of pesos. Over time, a wealth tax would also take some of the edge off the huge economic and political inequality in the country today.

Income taxes just won’t work to do this. The truly wealthy don’t rely on income to amass more wealth.

For instance, richest Filipino Manny Villar might have paid himself about Php5-6 million annually as one of Vista Land’s top executives before. At that rate, it would have taken him many years of working and not spending to accumulate his current reported net worth of Php344 billion. Over 57,000 years, actually.

The amassed Villar wealth is the foundation and, some would also say, result of the increasingly powerful Villar dynasty – a “good dynasty” as senate race-topping Cynthia Villar called it. Former senate president Manny Villar is also president of the Nacionalista Party, the Philippines’ oldest political party. Just an example of how concentrated wealth is democracy-distorting – it amasses political power in the hands of a few.

The minor relevance of income for the really wealthy explains why they don’t populate lists of the country’s highest personal income tax payers. Well, that and their having armies of accountants and lawyers and political connections to escape tax obligation.

Who are the super-rich?

Calling the wealth tax the “super-rich tax” will make it clear who the only targets are. It’s a tax that should be fully supported by over 99.9% of the population because they will definitely not be paying it.

The super-rich are the estimated 596 Filipinos with wealth over Php2.5 billion, and possibly some 2,200 with wealth of at least Php1.5 billion. The 50 richest Filipinos alone have a combined net worth of Php4.1 trillion, according to Forbes.

Nit-picking, the country’s “50 richest” are actually the country’s 65 richest – the 19 Sy, Ty, Consunji and Campos siblings are still counted as one under same family names – as single heirs to their respective fathers’ fortunes.

In any case, by IBON’s estimates, these 50 richest own more wealth than the poorest 71 million Filipinos combined. That’s one-half of one-hundredth of a percent (0.005%) of the population owning as much as the poorest two-thirds (65%). Such an extreme concentration of wealth makes a wealth tax extremely progressive.

The ‘least-rich’ of the 50 richest Filipinos is valued at Php6.8 billion, while the richest at a staggering Php896 billion.

There’s no easy way to visualize Php896 billion. Converted to Php1,000 bills, this would fit into 7,108 balikbayan boxes which, stacked one on top of the other, would be one-and-a-half times as high as Mayon Volcano. Laid end to end, they would reach from the northernmost tip of Batanes to the southernmost tip of Tawi-Tawi – 78 times. Or are enough to go almost four times around the world.

This is huge wealth among an uber-privileged handful, while tens of millions of Filipinos barely subsist, while millions of families struggle to eke out an uncertain living daily, and while hundreds of thousands suffer decrepit hospitals and schools every day.

Which is just to say that there’s more than enough money to provide a decent life for every Filipino now and for generations to come. The super-rich will not really feel if a small portion went to the government as a wealth tax.

A wealth tax of 1% on wealth above Php1 billion, 2% on wealth above Php2 billion, and 3% over Php3 billion is more than reasonable. This will raise Php236.7 billion annually just from the 50 richest Filipinos alone who by any standard are those who can best afford to pay much higher taxes. Applied to Php896 billion, this comes to less than 500 out of 7,108 balikbayan boxes.

The wealth tax would be on top of other taxes on income, interest earnings, dividends, the sale of stocks, or other capital gains the rich are wont to incur.

Challenges

The difficulties in designing, passing, implementing and enforcing a wealth tax are admittedly considerable.

What counts as wealth? This is actually among the trickiest parts. The idea is to tax wealth and assets, net of liabilities, rather than just incomes.

The Forbes list of the world’s richest supposedly covers all types of assets: ownership of companies, financial assets, real estate, property, and more. Wealth presumably includes things like art, car or jewelry collections, jets and yachts, precious metals, and the like, whether or not these are held in the country or abroad. And cash, of course – balikbayan boxes of it.

Estimating the value of wealth is undeniably daunting and will require a dedicated and incorruptible corps of lawyers, examiners, and experts. A decent amount of cooperation with foreign financial authorities is also necessary.

Won’t there just be avoidance and evasion? The country’s rich certainly have a lot of practice obscuring wealth from when they evade paying estate taxes.

But something must be wrong if that difficulty is used to justify taxing the poor instead – keeping wealth untouchable just because burdening the poor is easier is the worst kind of public policy. Imperfect information is never an excuse for inaction.

If administrative, logistical and regulatory costs are high then the wealth tax can be made higher; or it can be made lower and broader, if that will make compliance easier and the revenue take larger. There can also be a mechanism to avoid lack of cash being made an excuse to not pay the wealth tax. This might include, for instance, accepting payments even in non-cash assets.

Choices

Implementing a wealth tax also means a host of technical challenges and political obstacles. There’s getting it passed to begin with, which will need to surmount well-paid legal obstacles and well-placed political obstacles. There’s no doubt that the country’s most powerful families and their allies at the highest levels of government will mobilize against this and indeed any legislator supporting this.

The concern will not just be in the run-up to 2022 but to every election afterwards. Anyone even trying to loosen oligarchs’ grips on their fortunes will face their very long memories.

The bottom line: complexity and difficulty should not be reasons against a wealth tax. The only real way to overcome these is to do it – impose wealth as actual practice.

This is also the danger in buying too much into the finance department’s seemingly compelling arguments for ‘simpler’ and ‘more efficient’ tax systems as if these are ends in themselves. Buying into this narrative dangerously allows all sorts of sins like overburdening the poor, preserving wealth, and worsening inequality.

Albert Einstein should provide guidance. “It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” Or as it is neatly and self-referentially paraphrased: “Everything should be made as simple as possible, but no simpler.”

And the simple truth is that putting a wealth tax in place or avoiding this is a matter of simple political choice.