Your Taxes: Does Israel need to tax billionaires?

Israel is one of the first countries to enact Zucman’s proposals, but for people with a mere $250,000! We review Zucman’s proposals below (with permission of him and his publisher).

In France and other European countries, Zucman finds that the ratio of tax to national income is around 51%. However, billionaires apparently only pay around 25% of their income in taxes including income tax at an average rate of only 2%! The other taxes are corporate taxes, VAT, social security, etc. In the US, the ratio of tax to national income averages 30% because US citizens largely fund health care and pensions themselves.

According to Zucman, billionaires typically set up personal holding companies to hold and receive dividends from the profitable companies they are associated. They draw just enough salary to live off. The rest is invested. They pay tax on those salaries, but the salaries are a tiny percentage of what their personal holding company made

Zucman remarks that if an individual has made it into the billionaire club, it is fairly obvious that this is largely thanks to the education and healthcare they have received, the public goods and services that have allowed their business to prosper, and the government expenditure that has kept their property secure.

Zucman proposes an annual tax that tops up their personal tax to 2% of total wealth for individuals worth $100 million or more. Zucman estimates this could bring in $300-380 billion per year in tax revenue worldwide.

To counter emigration tax planning, Zucman said countries could tax their citizens wherever they reside. A tax that decreases over time is another option. A person who lived in, say, France for 50 years would continue to pay a linear fraction of 50/51 one year after migrating, 50/52 two years after migrating, and so forth.

How would unicorn start-up companies with no profits or no spare cash pay the wealth tax? By selling enough shares to third parties or paying the tax with shares or issuing shares to employees (as they pay income tax!).

The OECD corporate 15% “top-up tax” has rules for allowing one country to scoop up the tax, if not, other countries can do so. Zucman proposes a similar mechanism for the 2% wealth tax.

In his G20 report, Zucman said about half of the wealth of global billionaires is in shares of publicly listed companies, which are straightforward to value.

To value private businesses, tax authorities could apply the valuation multiples of profits, assets, or sales for similar listed businesses in the same industry

Zucman says adding beneficial ownership information to existing country-by-country reports (e.g., listing individuals owning more than 1% of the stock) would allow tax authorities to see most of their wealth, facilitating enforcement.

This resembles what Zucman proposes, but the threshold is only NIS 750,000 – around $250,000 – rather than $100 million! The 2% surtax isn’t imposed if 6% of chargeable accumulated profits are distributed as a taxed dividend, or if they are invested in certain business assets.

In addition, current year profits from a “labor-intensive” activity of a closely held company (exceeding 25% of revenues) may be attributed to shareholders and taxed at rates of up to 50%. Again, an exception applies if prior year accumulated profits were below NIS 750,000.

In practice, taxation is cat and mouse. New rules result in new tax planning techniques. It is unclear whether family members would each have a $100 million threshold.

As always, consult experienced professional advisors in each country concerned at an early stage in specific cases.