A global wealth tax is not such a crazy idea

The haters say it would be too difficult to shut down international tax havens. But the tax haven business has seen better days.

homas Piketty’s Capital in the Twenty-First Century has been praised to the skies for its historical analysis of income inequality. But one aspect of Capital that many people have dismissed is his solution to the problem: A global wealth tax. It would be too politically difficult, the logistics are impossible, and you’ll never crack down on international tax havens, the critics say.

One writer who hasn’t given up on the idea is Clive Crook, who writes that implementing the taxwill be easier than people think. I give Crook a lot of grief, but here I think he’s on to something, noting that an ongoing U.S. war against tax havens has been experiencing some success:

Plutocrats are mobile and can live and work where they please. They can hire teams of lawyers to advise them on domicile, residence, citizenship, and any of a thousand factors that will affect their tax liabilities. Cooperation among tax authorities in closing loopholes is therefore necessary. But it’s happening, and is likely to go further. [Bloomberg View]

This is all partly true! Starting a tax shelter shell company is now a huge pain in the neck, and a vigorous crackdown on tax cheats should at least be possible.

But Crook misses a piece of strong evidence in his favor: Being a tax haven isn’t all that great for small countries. The financial crisis and its aftermath have taught nations like Cyprus, Ireland, and Iceland the danger of having too much foreign capital. Indeed, the tax havens themselves might be amenable to a global wealth tax.

Ireland tried the tax shelter gambit as a general development strategy, and it backfired spectacularly. It turns out that a vast flow of hot money into a small country doesn’t create sustainable long-term investment. Instead, it creates bubbles, which tend to crash the economy when they pop.

Then there’s Cyprus, whose crazy bank speculation was fueled with Russian cash of dubious provenance.

Of course, Ireland and Cyprus are both on the euro, which caused unique complications. But even Iceland, with its sovereign currency, is still suffering the effects of a massive banking collapse in 2008 caused by a run by foreign depositors.

This is not to downplay the incredibly steep political hill that any global wealth tax would have to climb. And there will likely always be a few small places (e.g., Bermuda) whose governments are corrupt enough to be bought off, allowing wealthy tax cheats to hide their billions.

But a big lesson of the 2008 crisis is that unrestricted capital flows are hugely destructive to everyone involved. International coordination to restrict capital movement is already happening in certain places. A similar effort to tax wealth wouldn’t be all that different.