Around the globe governments spent massively to soften the effects of Covid-19 on their economies. They spent a combined total of $16 trillion in the year to April 2021, according to the International Monetary Fund. As a result, debt-to-GDP ratios have risen. Globally, the debt-to-GDP rose to 97.3% in 2020, from 83.2% in 2016; the ratio is expected to increase to 99.3% by 2026. Advanced countries’ debt/GDP rose from 105.5% in 2016 to 120.1% in 2020 and is expected to reach 121.1% in 2026. Emerging countries experienced an increase from 48.4% to 64.4%, expect to reach 73.2% in 2026. Low-income countries debt/GDP rose to 49.5% from 39.8%; to decline to 45.7% in 2026 (higher than its 2019 figure of 44.3%). The recent elevation of debt/GDP ratios brings sustainability of sovereign debt to the forefront of policy discussion as economies begin to recover.
Low interest rates have helped countries service their sovereign debt burdens. This situation may not last as the U.S. Federal Reserve has signaled interest rate increases for 2023. Renewed growth will improve tax revenues and reduce expenditures via stabilizers in the medium- and long-terms. However, fiscal deficits are projected to persist despite improvements in the coming years (see IMF: table 1.1), which means national debts are set to increase.
When a national government runs into problems servicing its debt the typical responses are to restructure the debt and/or introduce austerity into fiscal budgets. Unfortunately, the introduction of austerity has the immediate effects of worsening unemployment and weakening social safety nets. Austerity measures, moreover, often do not account for cultural and institutional structure of countries (see Suzanne Konzelmann, Austerity, Polity Press, 2019). Could sustainability be achieved differently?
The IMF has suggested that pandemic-related expenditures could be met by temporarily raising taxes on income or wealth. While income taxes could be effective their burden lands on workers and firm owners. Wealth holders bear the burden of wealth taxes. However, this type of tax has not been very effective due to issues such as tax avoidance and evasion and the costs of administering the tax. A relatively undiscussed issue is wealth taxes are typically defined on net wealth, assets minus liabilities. This implies debt can be used to lower a wealth tax liability and undercut the tax’s effectiveness.
A wealth tax based upon gross private assets, rather than net assets, might work. Wealth has increased tremendously for the top wealth holders since the Covid-19 pandemic began. According to Oxfam, the combined wealth of the top richest men increased by US$540 billion between March 2020 and December 2020; for all billionaires, it increased US$3.9 trillion (Oxfam 2021: 12). A tax on gross assets is not a new idea; it can be attributed to the late economist Michał Kalecki. The orientation of sustainability is how to complete (net) interest payments, at least, on sovereign debt consistently and directly. A Kaleckian wealth tax is defined as: national debt x interest rate = tax x assets. The tax is equitable in that everyone’s assets are subject to the tax, with possible exemptions for the poor, owner-occupied dwellings (under a certain threshold) and small business owners and tradesmen. Because of lack of data, estimates of the tax were never generated. Fortunately, the United States now has the data to estimate it.
The current size of the national debt for the United States is US$22.5 trillion. The size of assets is US$325 trillion. With respect to the interest rate, the highest interest rate in a 10-year forecast period is 3.15%; we use this as the worst-case scenario. With this information, the wealth tax is 0.22%. When applied to private assets it yields revenue of US$715billion. Net interest outlay is projected to be US$345 billion, which leaves US$370 billion left over. That money could be used to reduce reliance on new borrowing in plans for fiscal spending and keep austerity at bay. Over a 10-year period, it will generate nearly $10 trillion in revenue. This is enough to cover the net interest outlays in the forecast period, about $4.04 trillion, and leave nearly $6 trillion as a surplus to reduce reliance on new borrowing, fund green initiatives associated with a Green New Deal and reinforce the social safety net (please see Schroeder (2021) for more detail).
The reduction in reliance on new borrowing can slow, if not reverse, the debt-to-GDP ratio, by slowing the growth of the numerator. The reversal of the ratio can be assured if the surplus funding supports new expenditures for green initiatives so that a multiplier effect kicks in. In the event of negative interest rates, the structure of the tax shifts to a tax on assets which ensures that net interest payments are met (tax x assets = net interest payments). A suggestion is to set the tax higher to ensure consistency in payments and generate funds to slow new borrowing and fund social and green initiatives. For instance, if the interest rate were negative in the U.S., the wealth tax could be calculated as net interest payments/assets, US$345 billion/US$325 trillion or 0.1%, with a suggestion to increase it to 0.15% .
A challenge for implementing a Kaleckian wealth tax is the accuracy of data on assets. For instance, Australia’s data on assets is good, but incomplete; data on assets are available for households, non-financial corporations, and financial corporations. There is no publicly available data on small and medium sized enterprises. (Footnote: Using what is available the wealth tax is approximately 0.1%, see website for calculation.) Another issue is that data on assets for any country is likely to be underreported because of the use of tax havens by high wealth holders; Emmanuel Saez and Gabriel Zucman, for instance, have documented the extent of tax havens and opportunities to improve data on assets. Obtaining data is not insurmountable. It is in the wealth holders’ interest to be forthcoming on assets because more complete information will lower the tax. Another challenge is convincing policy makers and the public, more generally, the tax not only releases fiscal budgets from the threat of austerity, but also enables governments to spend much more liberally on initiatives which strengthen social safety nets and enable green transitions. It offers a chance to thwart the threat of austerity and end the neoliberal era – for good.