Here's how a revamped wealth tax could fuel the COVID recovery

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  • With COVID-19 support schemes increasing governments' debt burdens, countries are in search of tax receipts.
  • Wealth taxes mean the rich are taxed on the assets they own rather than their earnings.
  • A smart approach to wealth taxes could boost innovation and investment.

Earlier this month, Millionaires for Humanity, a group comprising 83 of the world’s richest people, called on governments to increase their taxes in the wake of COVID’s economic fallout.

The idea is promising but to be truly successful it must be implemented in such a way that gains broad support from the rich. Otherwise, it will simply incentivise them to take their capital – and their residency – elsewhere.

Wealth taxes – where the rich are taxed on the assets they own rather than their earnings – represent one of the most popular new policy ideas in the last year. American senators Elizabeth Warren and Bernie Sanders both suggested the idea in their respective campaigns for the 2020 Democratic party primary.

In the UK, the opposition Labour party has made a wealth tax one of its flagship policies, with public debt reaching record-breaking levels due to COVID-19 relief schemes.

Despite strong arguments and some high-profile advocates for wealth taxes, many countries have in fact moved away from them recently. In 1990, 12 OECD countries had a wealth tax. By 2018, it was intact in only three countries.

This is, in part, explained by poor economic returns from wealth taxes. French economist Eric Pichet estimated that France lost double the actual revenues they gained from their version of the wealth tax due to capital flight – it was abolished in 2017. It seems that the only effective wealth tax is a wealth tax “by consent”.

Left-wing support for wealth taxes can create the impression that they are an attack on capitalism. But smart wealth taxes can preserve capitalism in its most sustainable and meritocratic forms by increasing innovation, entrepreneurship and wealth creation, rather than simply wealth preservation.

Although a wealth tax appears to be a ‘new’ policy idea, it is in fact a traditional – and some would say intuitive – form of taxation. The ancient Greeks levied the eisphora wealth tax on the richest Athenians, particularly during times of war. Given that the pandemic and the response to it has been likened to a war by many leaders, perhaps there is readiness for a modern day, post-COVID ‘eisphora’.

More recently than the ancient Greeks, Zakat alms functioned as a 2.5% wealth tax on liquid assets throughout Islamic history, and is a key part of the aim of Islamic economies to facilitate free trade while limiting inequality. This model has been replicated in non-governmental form by organisations like the National Zakat Foundation in the UK and the Zakat Foundation of America...