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.
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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.
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.
It is estimated that the assets under management by investment funds domiciled in the EU amount to over €40 trillion (ESRB 2019). This implies that a levy of one half of 1 % on their assets could yield €200 billion, 2 % of GDP (similar in size to the Corona solidarity fund championed by President Macron).
Banks could serve to collect the levy in two ways: bank deposits and the securities deposits clients hold with them. Here again the base is large. Non-bank deposits amount to another €16 trillion (ESRB 2019), which could yield an additional €80 billion, again assuming a levy of 0.5 %.
To this one would have to add the shares and bonds held by households in deposits at banks which could yield another €50 billion in revenues.
The total revenues collected this way could thus be well above €300 billion. This might not be quite enough for a European Solidarity Fund, but it could provide the bulk of what is needed in a very short time.
All that would be required to implement the levy would be identical legislation in all EU member states to direct these two classes of intermediaries to deduct this 0.5 % of their assets under management and deposits from the accounts of the holders and transfer the sums involved to the European Solidarity Fund. The burden of the levy would thus not be on the intermediaries, but on the households and firms holding these assets. Implemented quickly it would come as close as possible to the non-distortionary capital levy economists dream about.
A levy as the one described here, limited to two classes of intermediaries, would, of course, leave out some pockets of financial assets and would not tax other forms of wealth, such as real estate. It would thus not be as fair as a wealth tax, or a tax on the wealthy – at least in theory. But it has the advantage that the levy could be implemented quickly and would not create any distortions (see Bulow and Summers (1984) on why taxing risky assets might not be optimal). At present, the key concern should not be justice, but speed and effectiveness. Moreover, a tax on financial assets should in reality have a high degree of fairness as holdings of financial assets are very unequally distributed, with higher income households typically holding much more financial assets than poorer ones.
The tax base would, of course, be unevenly distributed among member states. But financial assets per capita are higher in richer countries. Moreover, most of the levy would come from investment certificates, which are often issued by companies domiciled in Luxembourg, thus making it more difficult to ascertain how much the citizens of each member state contribute to the overall sum. This, admittedly thin, veil of ignorance would differentiate the financial levy from the typical contributions to the EU budget which are based only on national income.
Moreover, the levy could easily be made to fit into national tax systems. The financial intermediaries would simply send all holders of the assets from which the levy has been deducted a corresponding certificate. It would then be up to national tax authorities to take these payments into account in national income taxes, for example.
A strong case can be made for allowing government to run deficits during this crisis in order to distribute the distortions resulting from taxation over time. However, a one-time capital levy would fit this principle since it does not create distortions.
One-time capital levies are difficult to motivate during normal times because the one-time nature would always be subject to doubt. But for once, one can argue that ‘this time is different’.
Alstadsæter, A, N Johannesen and G Zucman (2019), "Tax evasion and inequality", American Economic Review 109(6): 2073-2103.
Alvaredo, F, L Chancel, T Piketty, E Saez and G Zucman (eds) (2018), World inequality report, Belknap Press.
Baldwin, R (2020), “COVID-19 testing for testing times: Fostering economic recovery and preparing for the second wave”, VoxEU.org, 26 March.
Baldwin, R and B Weder di Mauro (eds) (2020a), Economics in the Time of COVID-19, a VoxEU.org eBook, CEPR Press.
Baldwin, R and B Weder di Mauro (eds) (2020b), Mitigating the COVID economic crisis: Act fast and do whatever it takes, a VoxEU.org eBook, CEPR Press.
Brülhart, M, J Gruber, M Krapf and Kurt Schmidheiny (2019), “Wealth taxation: The Swiss experience”, VoxEU.org, 23 December.
Bulow, J I and L Summers (1984), “The Taxation of Risky Assets”, Journal of Political Economy 92(1): 20-39.
Eichengreen, B (1990), “The capital levy in theory and practice”, in R Dornbusch and M Draghi (eds), Public Debt Management: Theory and History, Cambridge University Press.
ESRB (2019), “EU Non-bank Financial Intermediation Risk Monitor Statistical overview July 2019”, NBFI Monitor No 4.
Gros, D (2020), “EU solidarity in exceptional times: Corona transfers instead of Coronabonds”, VoxEU.org, 05 April 2020.
Insalaco, G and E Schaanning (2020), “European Corona Solidarity Bonds”, Available at SSRN.
Landais, C, E Saez and G Zucman (2020), “A progressive European wealth tax to fund the European COVID response”, VoxEU.org, 03 April 2020.
Sarin, N and L H Summers (2019), “Fair, comprehensive tax reform is the right path forward”, The Boston Globe, 28 March.
1 Gros (2020) shows that despite the small size of the EU budget it would be possible to make a substantial transfer to countries in need by reducing the contributions of the countries hardest hit by the crisis to the EU budget for the duration of the next Multiannual Financial Framework (2021-2027).