When the governors of the World Bank and the International Monetary Fund convened for the spring meetings last week, it was all about the really big questions. What can the international community do to accelerate decarbonisation and fight climate change? How can highly indebted countries retain fiscal space to invest in poverty eradication, social services and global public goods? What does the international community need to do to get back on track towards reaching the Sustainable Development Goals (SDGs)? How can multilateral development banks be strengthened to support these ambitions?
There is one issue that makes addressing these global challenges much harder: inequality. While the disparity between the richest and poorest countries has slightly narrowed, the gap remains alarmingly high. Moreover, in the past two decades, we have witnessed a significant increase in inequalities within most countries, with the income gap between the top 10% and the bottom 50% nearly doubling. Looking ahead, current global economic trends pose serious threats to progress towards higher equality.
The multidimensional character of inequality is undeniable. Basic services such as healthcare and education are not equally available to all. Often, this inequality of opportunity is handed down from generation to generation. Social origins, gender, race or where people live are some of the factors that play a role in reproducing inequalities. Furthermore, high inequality harms economic development because it inhibits innovation and prevents people from developing their full potential. It is corrosive to democracy and weakens social cohesion. And where social cohesion is weak, there is less support for the structural reforms we will need to undertake in the coming years, such as the necessary transformation towards a net zero economy.
Fortunately, there is a growing global awareness of the importance not only of growth, but of sustainable and equitable growth. Increasing prosperity while tackling inequality within and across countries and generations, including entrenched race and gender inequalities, should not be at odds. Achieving truly sustainable growth lies in balancing three fundamental concerns: economic, social, and environmental.
It is against this background that Brazil has made the fight against hunger, poverty and inequality a priority of its G20 presidency, a priority that German development policy also pursues and that Spain has ambitiously addressed domestically and globally. By directing two-thirds of total expenditure on social services and wage support, as well as by calibrating tax policy administration, South Africa continues to target a progressive tax and fiscal agenda that confronts the country’s legacy of income and wealth inequality.
It is time that the international community gets serious about tackling inequality and financing global public goods. One of the key instruments that governments have for promoting more equality is tax policy. Not only does it have the potential to increase the fiscal space governments have to invest in social protection, education and climate protection. Designed in a progressive way, it also ensures that everyone in society contributes to the common good in line with their ability to pay. A fair share contribution enhances social welfare.
With exactly these goals in mind, Brazil brought a proposal for a global minimum tax on billionaires to the negotiation table of the world’s major economies for the first time. It is a necessary third pillar that complements the negotiations on the taxation of the digital economy and on a minimum corporate tax of 15% for multinationals. The renowned economist Gabriel Zucman sketched out how this might work. Currently, there are about 3,000 billionaires worldwide. The tax could be designed as a minimum levy equivalent to 2% of the wealth of the super-rich. It would not apply to billionaires who already contribute a fair share in income taxes. However, those who manage to avoid paying income tax would be obliged to contribute more towards the common good.
The argument behind such tax is straightforward: we need to enhance the ability of our tax systems to fulfil the principle of fairness, such that contributions are in line with the capacity to pay. Persisting loopholes in the system imply that high-net-worth individuals can minimise their income taxes. Global billionaires pay only the equivalent of up to 0.5% of their wealth in personal income tax. It is crucial to ensure that our tax systems provide certainty, raise sufficient revenues, and treat all of our citizens fairly.
A coordinated global minimum levy on billionaires would constitute a significant step in this direction. It would boost social justice and increase trust in the effectiveness of fiscal redistribution. It would generate much-needed revenues for governments to invest in public goods such as health, education, the environment, and infrastructure – from which everybody benefits, including those at the top of the income pyramid. Estimates suggest that such a tax would potentially unlock an additional $250bn in annual tax revenues globally – this is roughly the amount of economic damages caused by extreme weather events last year.
Of course, the argument that billionaires can easily shift their fortunes to low-tax jurisdictions and thus avoid the levy is a strong one. And this is why such a tax reform belongs on the agenda of the G20. International cooperation and global agreements are key to making such tax effective. What the international community managed to do with the global minimum tax on multinational companies, it can do with billionaires.
Fighting inequality requires political commitment – a commitment to the objectives of inclusive, fair and effective international tax cooperation. Surely, it needs to go hand-in-hand with much broader approaches that reduce not only wealth inequality but also social and carbon inequalities. The challenges that lie ahead are huge, but we stand ready to engage in concerted multilateral action to tackle them.
Svenja Schulze is Germany’s minister for economic cooperation and development; Fernando Haddad is the minister of finance in Brazil; Enoch Godongwana is the minister of finance in South Africa; María Jesús Montero is first vice president and minister of finance and Carlos Cuerpo is the minister of economy, trade and business in Spain