22 April 2020

VOX: Daniel Gros - A corona financial solidarity levy

Multiple proposals for a ‘solidarity fund’ have been made. This column argues that a one-time EU-wide levy on financial assets could raise €300-400 billion, and thus finance a European Solidarity Fund. ..and would avoid the need for controversial Coronabonds.

As the economic costs of the pandemic are becoming apparent all over Europe, a consensus is developing that some sort of European solidarity is required to help those countries which are hardest hit by the crisis (Baldwin and Weder di Mauro 2020a,2020b). It is also becoming clear that expenditure in the hundreds of billions will be needed at the EU level to make a meaningful contribution to the extraordinary budgetary efforts member states are making.

Given that the EU budget is rather small (1 % of GDP),¹ it is commonly assumed that the expenditures needed now to fight the crisis should be financed by a solidarity fund, which would finance itself via some form of Coronabonds, or similar instruments. A number of proposals have been made for how to finance such a solidarity fund. Landais et al. (2020) propose backing Coronabonds with the future proceeds from a wealth tax. Insalaco and Schaaning (2020) propose a similar construction but relying on a regular capital levy instead of a wealth tax.

However, there is no need to first create Coronabonds and then repay them with the proceeds from a wealth tax. A one-time levy on financial assets held by households and non-financial enterprises would be sufficient to raise the needed funds .

There are two key points which distinguish the levy on financial assets proposed here from other proposals involving wealth taxes. It would (a) be a one-time levy, and (b) be collected by financial intermediaries, minimizing administrative costs while yielding a large base.

One-time levy

The difficulties in implementing permanent wealth taxes are well known. Financial wealth can easily be moved across jurisdictions and the high net worth individuals targeted by such a tax are extremely mobile. This high mobility is also the reason why the few historical cases with successful wealth taxes (Eichengreen 1990) are not relevant - they succeeded in a few places during a period of limited capital (and personal) mobility. The experience from Switzerland shows the limitations of a regular wealth tax in today’s environment of high personal and capital mobility (Brülhard et al. 2019).

A one-time levy, by contrast cannot be anticipated and thus does not suffer from this problem. Any one-time levy carries, of course, the risk that it will be repeated in future and might thus lead to behavioural changes. But in the present circumstances, the case can be made that the situation is so exceptional that it will remain a unique operation. Anticipation effects can be limited by setting the date for measuring the base for the levy at the time of the announcement, thus rendering selling of shares or investment certificates useless.

Using intermediaries instead of assessing individuals

A tax on the wealthy is naturally very attractive, especially given the high degree of inequality in the distribution of wealth documented many times (Alstaeder et al. 2018, Alvaredo et al. 2019). But in reality it remains always extremely difficult to implement a tax on the ‘wealthy’. For example, the recent proposal by Landais et al. (2020) of a Corona wealth tax targeting only the richest 1 % or even less would require the authorities to ascertain the net wealth of millions of individuals. By contrast, the financial levy proposed here could rely on a much smaller number of financial intermediaries to collect the revenue at source. There would be no need to go into complicated calculations of the net worth of individuals, their family members, proxy accounts etc.

A levy extracted directly from financial intermediaries would also circumvent the problems posed by international financial centres and the exchange of information on individuals and beneficial owners.

The key criterion for selecting the base for a financial levy should be the ease of implementation via a restricted number of financial intermediaries. There are two sets of financial intermediaries which in practice would ensure a large tax base: investment funds and banks.

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