As talks over a new climate finance target are set to dominate the United Nations (UN) COP29 summit later this year, London-based Tax Justice Network has found that a modest wealth tax on the world’s super-rich could foot the external climate financing bill for developing nations twice over.
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Based on the advocacy group’s estimates, replicating Spain’s model – which levies a 1.7 to 3.5 per cent tax on its richest 0.5 per cent – across 172 countries could raise US$2.1 trillion, even after accounting for potential capital flight, or the exodus of money from a nation.
The UN-convened Independent High-Level Expert Group on Climate Finance estimates that around US$2.4 trillion – US$1 trillion of which needs to come from international sources – is needed each year by 2030 for developing countries, excluding China, to shift to clean energy and build climate resilience.
To close this financing gap, world leaders are expected to set a new collective quantified goal on climate finance (NCQG), which is meant to replace the current US$100 billion pledge from 2025 onwards, when they next re-convene in Baku, Azerbaijan.
Pre-COP29 talks in Bonn, which concluded in June, failed to make progress on this new funding target due to divisions over whether wealthier developing nations like China and Saudi Arabia should also pay up on top of developed countries, who have historically contributed the most to global warming.
At the moment, less than 20 per cent of the needed climate funding flows to poorer nations and only 3 per cent to the world’s least developed countries, according to data by United States non-profit Climate Policy Initiative.
In recent years, wealthy nations have committed public funding through blended financing mechanisms, such as the Just Energy Transition Partnerships (JETP), to mobilise more private investments to help wean developing countries off coal, which is the single largest source of climate-warming emissions.
However, a large part of JETP deals extended to Indonesia and Vietnam – home to the two largest coal fleets in Southeast Asia – are made up by costly loans, which has raised concerns that such initiatives could add to the existing debt burden of developing states.
Southeast Asia has faced difficulties raising low-cost financing to phase out 106 gigawatts (GW) of existing coal-fired power plants – excluding planned capacity in the pipeline – by 2040.
Based on Tax Justice Network’s estimates, Southeast Asia could raise nearly US$40 billion – with over US$14 billion coming from Singapore – just by taxing the region’s richest 0.5 per cent of households. Doing so could also boost Southeast Asia’s spending budget, on average, by 8.8 per cent.
Potential increase in wealth tax revenues and the proportion of total tax revenues they would make up for each Southeast Asian country, based on Tax Justice Network’s estimates. Parts of the chart are greyed out for Brunei and Myanmar, as there is no publicly available data on their current government tax revenues. Image: Gabrielle See/ Eco-Business
Singapore, which has one of the world’s highest concentration of millionaires, currently has no wealth taxes, apart from levies on high-end properties and luxury cars.
The city-state’s prime minister Lawrence Wong has argued in his previous capacity as finance minister that there is a high risk of wealth fleeing Singapore to other places with lower taxes, if a wealth tax were to be introduced.
Wong also pointed out in the same interview that some European nations, like Germany, France and Denmark, have stopped levying taxes on the net wealth of individuals, citing high administrative costs, risk of capital flight and the failure to raise substantial revenue.
However, Mark Bou Mansour, head of communications at the Tax Justice Network, refuted that this was a plausible argument against a wealth tax. “The existing evidence points to fairly low costs for taxpayers and tax authorities,” he said, citing a study by the United Kingdom’s Wealth Tax Commission, which reviewed international evidence and estimated that costs to taxpayers and tax authorities are at most 0.3 and 0.1 per cent respectively.
“In Singapore’s case, since it already taxes property and participates in the multilateral, automatic exchange of financial account information… the country is well-placed to make a wealth tax both effective and cost-efficient,” he told Eco-Business.
Call to end the ‘two-tier’ treatment of wealth
Singapore’s finance ministry has stated that the wealthy have not been taxed more because the republic already “has a progressive tax system” where “higher income earners already pay more taxes at higher tax rates.”
Furthermore, it argues that its blanket tax on goods and services – which economists regard as a regressive tax that impacts low-income citizens disproportionately – also taxes top earning individuals more, since they spend more.
But the study said that it is precisely this differentiated treatment between “collected wealth” and “earned wealth” – which the Tax Justice Network calls the “two-tier treatment of wealth” – which has made economies highly unequal and insecure.
Collected wealth, which includes dividends, capital gains and rent gained from owning things, is typically taxed at far lower rates than earned wealth, which refers to salaries gained by working. However, collected wealth tends to grow faster than earned wealth, the campaign group said.
“The two-tier treatment has produced extreme results when it comes to the very richest individuals. Billionaires tend to pay tax rates that are half the rates paid by the rest of society. And their wealth grows at twice the rate as that of the rest of society. This has contributed to the wealth of the 0.0001 per cent [of society] quadrupling since 1987, to the detriment of economies, societies and planet,” stated the report’s press release.
Momentum for a coordinated minimum tax on the wealthiest individuals and corporations has grown over the past year.
In June, the Group of 20 (G20) nations, led by Brazil, proposed a 2 per cent minimum tax on the ultra-rich, inspired by the planned global minimum corporate tax rate for multinationals, which 130 countries reached an agreement on in 2021.
While several countries in Europe, Latin America and Africa have backed this proposal, the United States and Germany have emerged as key holdouts. It is unclear where the leaders of China, Indonesia, Japan and Korea – Asian countries which are represented in the G20 – stand on this recommendation.
However, a recent Ipsos survey found that among all the G20 countries, support for a wealth tax was the highest among citizens in Indonesia, followed by Turkey, the United Kingdom and India.
“The vast majority of countries are currently working on what can be the biggest shakeup in history to global tax rules,” said Alison Schultz, a research fellow at the Tax Justice Network and one of the report’s authors.
“But a minority of rich countries still seem to be holding back from support for a robust framework convention on tax… Some of the same countries are blocking real progress on climate in COP29 – stopping the world from clawing back trillions in tax from tax havens in one meeting, and then claiming in the other meeting that there’s no money for the climate crisis.”
