The European Union faces the twin crises of Covid-19 and climate change. Confronting both crises requires an unprecedented volume of public resources. The question of how to raise these funds without jeopardising a weak COVID recovery while doing so in a fair way without undermining broad political support for climate action, poses a major political and economic challenge.
This policy study investigates the potential of a European net wealth tax to raise substantial revenues while supporting the economy and the consensus on climate action. To achieve this, household survey data from the European Central Bank (covering 22 EU countries) are analysed. The results show that:
- Household wealth is highly concentrated among the wealthiest households: the richest 1% hold 32% of total net wealth in the EU22 while the poorest half of all households only hold about 4.5% of total net wealth.
- A periodic tax on net wealth could raise revenues between €192 billion (1.6% of GDP) and €1,281 billion (10.8% of GDP) across the EU22 per year. Non-progressive (flat tax) designs yield revenues at the low end of this range while highly progressive designs are responsible for the high revenue estimates at the upper end of this range.
A combination of clever design choices, more resources and better infrastructure for the EU’s tax authorities would make a European net wealth tax feasible. With respect to the tax design, high exemption thresholds between €1 million and €2 million, paired with progressive tax rates and a broad tax base, imply that only the richest 1% to 3% of all households are taxed and thus the problem of illiquid tax subjects is avoided, while keeping the revenue potential high.
This policy study shows that overall, a European net wealth tax has the potential to make a substantial contribution to the EU’s efforts to organise a decisive response to the twin crises of Covid-19 and climate change.
Appendix to the study (75 pages)