Tax doesn’t matter much if you’re rich enough
Would-be billionaires often say they’re discouraged by high tax rates. For example, the British Venture Capital Association complained the UK’s increase in the tax rate on capital gains to 28 percent, would damage capital formation. The latest World Wealth Report from Merrill Lynch and Cap Gemini suggests otherwise.
The report looks at what used to be called rich people, who are now known as high net worth individuals (HNWI). The cut-off is investible capital of $1 million.
The financial crisis and recession have been a little rough on those at the top of the global economic heap. From booming 2006 to busting 2009 both the millionaire headcount and their total net worth increased by a piddling 5 percent — to 10 million and $39 trillion respectively. After inflation and a generally weak dollar, it’s a loss.
They are still rich and numerous enough to be worth studying. One trend is not surprising. During the period, the global millionaire mix shifted away from the finance-intensive United States and UK towards rapidly growing China, India and Brazil. It certainly wasn’t tax rates that made the difference.
Another pattern is more surprising — the lack of correlation between the concentration of wealth and the rate of taxes. A good measure is the ratio of HNWI to billion dollars of GDP, which corrects for the larger number of millionaires in richer countries.
In that count, low-tax Switzerland is in the lead, with a ratio of 453. Low-tax (and high government-spending) Japan is second at 323. But high tax Germany comes in third at 263. And the ratios in lightly taxed China, Brazil and India are all well down, around 100.
Tax rates are not a key ingredient in the recipe for growing millionaires. Social factors play a role. As for economic policy, two things seem to be necessary. First, a high savings rate. That helps explain why Germany and Japan are ahead of Britain and the United States. Second, time. Traditionally rich countries are more millionaire-rich than the nouveaux riches. But China’s extraordinary savings and growth rates should enable it to catch up soon.