Billionaires are in the headlines again, with a report from Oxfam estimating that 11 Irish citizens now fall into this category, two more than in 2023. Their combined wealth exceeds €50 billion.
While Oxfam did not name names, Forbes previously estimated the richest Irish citizen to be Indian-born engineering tycoon Shapoor Mistry, who is worth close to $10 billion (€9.6 billion). Oxfam used the report, issued to coincide with the annual Davos gathering of the super wealthy, to argue for new taxes on the rich. And that brings an interesting issue into focus: while better-off people generally pay more tax on their incomes, the very richest often pay very little.
It varies from country to country but the small numbers at the very top of the pile – Forbes identified 2,640 billionaires worldwide last year – often pay very little. French economist Gabriel Zucman estimates they pay as little as 0.3 per cent of their wealth in tax each year. How is this possible?
1. The evidence
It is important first of all to look at the basics. Two separate issues are at play here – one is tax on income, what people earn every year, and the second is tax on wealth, the stock of assets built up over time. Statistics here are limited as tax authorities do not typically break down payments from the billionaire class. And there is no information on the tax affairs of the small number of Irish billionaires, many of whom do not pay their taxes in Ireland.
However, important work by Zucman, an economics professor, and the EU Tax Observatory, a research institute based in Paris, casts significant light on the low levels of income tax paid by the very wealthiest. Income tax systems are generally progressive, meaning the more your earn the higher the proportion of your income you pay in tax. But there is a kink at the very top with the graph turning downwards. The very richest, in other words, pay less.
Figures quoted by Zucman relate to a relatively small number of countries but they are big players and the evidence is compelling. In France, for example, where income taxes are relatively high, most people pay an effective rate of 52 per cent, while billionaires pay just 27 per cent. The same is seen in Italy, the Netherlands and – most importantly given the number of billionaires who live there – the United States, even though the kink downwards in the average rate people pay kicks in at slightly different points depending on different tax systems. In France and the US, the decline in the effective rate starts at about 99.99 per cent, while in Italy and the Netherlands it starts at about 95 per cent (in other words the top 5 per cent pays less).
Meanwhile, taxes on wealth are patchy across the world; in many cases tax is only levied when an asset is sold and a profit booked and only a small number of countries have an actual tax on wealth. In Ireland there is no wealth tax per se – there is a range of capital taxes on profits and inheritances, though these are low by international standards.
Internationally, there are often generous tax reliefs related to inheritance – Oxfam estimates that an increasing number of billionaires are people who inherited the bulk of their wealth. Zucman’s work also shows that in countries where data is available, the richest also pay little by way of capital and wealth taxes, even in countries like France where there is a specific wealth tax. On average, people in countries where data is available, as mentioned above, pay the equivalent of about 1.1 per cent of their wealth in individual capital taxes while the rate for billionaires is less than a quarter of that, about 0.3 per cent.
As a result of this, and the nature of their wealth, billionaires have done well in recent years, grabbing an ever larger share of total global wealth.
2. The tax tricks of the rich
Many of the very richest pay little income tax for a very simple reason: they don’t earn much annual income for tax purposes. A tax leak to the US organisation ProPublica in 2021 showed how many of the biggest names in US business such as Jeff Bezos, Elon Musk and Warren Buffett paid low levels of federal income tax – or none at all in some cases in specific years – as they generally declared low levels of taxable income.
Most billionaires own and run big corporations and opt to take little or nothing out in salary. Instead they are typically “paid” in stock options or the rise in value of their existing holding in a company or companies they own large stakes in.
Zucman defines this as an “economic income” – they are gaining financially from their work – but it is not income as defined for tax purposes. Depending on the jurisdiction they live in, there are often tax-efficient ways of cashing in. At a basic level, capital gains taxes are generally lower than income taxes. But tax lawyers can also lower bills in this area – for example, finding losses to write off against gains. Often the super-rich control companies privately and can manage dividend policy, too.
And often the super-rich fund their lifestyle by borrowing, pledging their assets as security against these loans. Then the cost is the interest on these loans, which was very low for many years running up to the spike in inflation and is now on the way down again.
The super-rich also often use holding companies which become nominal owners of shares, allowing dividends to be paid without incurring an immediate tax liability. In many countries anti-abuse rules limit the use of such structures. But that often isn’t a problem for the highest earners, many of whom choose to become tax resident in countries with looser rules and lower tax rates.
Offshore tax structures, typically based in the Isle of Man and Channel Islands, were a traditional source of (not always legal) moves by wealthy Irish people over the years to reduce their tax bill. And famously there were the Ansbacher accounts based in the Cayman Islands. Irish anti-abuse legislation has been significantly tightened in these areas over the years.
3. What can be done?
A proposal by Zucman and the EU Tax Observatory to introduce a global tax of 2 per cent on global billionaires – which he calculates would raise $200 (€192 billion) to $250 billion in tax revenue annually – was discussed by the G20 group of nations under the Brazilian presidency last summer. He based his proposal on the global minimum tax for multinationals agreed under the aegis of the OECD in 2021, arguing that the same backstops could apply in personal taxation to ensure that the system would work even if every country did not sign up.
G20 leaders did not sign up to the tax proposal but did agree to “engage cooperatively to ensure that ultra-high-net-worth individuals are effectively taxed”. And now there is an obvious problem. It is a new incumbent in the White House supported by a group of rich businesspeople most unlikely to support such a plan.
International co-operation has made a difference in the taxation of the super-rich in recent years, most notably through the exchange of information between tax authorities, which has sharply reduced illegal evasion. But billionaires can still use legal structures to pay a lot less. And the richer you get, and the less you rely on a paycheck from your employer, the greater is the opportunity to cut your tax bill.
