A global minimum tax on billionaires, equal to 2% of their wealth, and a strengthened global minimum tax on multinational companies, free of loopholes, would raise $500 billion a year, a new study says.

The minimum tax on billionaires will have a revenue potential of close to $250 billion (from less than 3,000 individuals) annually, said the Global Tax Evasion report 2024.

Strengthening of global minimum tax on multinational companies would raise an additional $250 billion per year.

To give a sense of the magnitudes involved, recent studies estimate that developing countries need $500 billion annually in additional public revenue to address the challenges of climate change – needs that could thus be fully addressed by the two main reforms, the report proposes.

Low tax on billionaires

The pioneering research by EU Tax Observatory, in partnership with tax administrations, shows that global billionaires have very low personal effective tax rates, of between 0% and 0.5% of their wealth. Personal taxes include all individual income taxes and wealth taxes when they exist. In a country like the United States the effective tax rate of billionaires appears closer to 0.5%, while in a country like France it is closer to 0%. When expressed as a fraction of income and considering all taxes paid at all levels of government (including corporate taxes, consumption taxes, payroll taxes, etc.), the effective tax rates of billionaires appear significantly lower than those of all other groups of the population.

The report says over the last 10 years, governments have launched major initiatives to reduce international tax evasion. These efforts include the creation of a new form of international cooperation long deemed utopian – an automatic, multilateral exchange of bank information in force since 2017 and applied by more than 100 countries in 2023 – and a landmark international agreement on a global minimum tax for multinational corporations, endorsed by more than 140 countries and territories in 2021.

Yet despite the importance of these developments, little is known about the effects of these new policies. Is global tax evasion falling or rising? Are new issues emerging, and if so, what are they? These questions are of tremendous importance in a context of rising income and wealth inequality, high public debt in the post-Covid-19 context, and large government revenue needs for addressing climate change and for funding health care, education, and public infrastructure, the report says.

This report addresses these issues thanks to an unprecedented international research collaboration and major data improvements.

Prepared by the staff of the EU Tax Observatory – a research laboratory created in 2021 with unique expertise on international tax issues – this report summarises work conducted by more than 100 researchers all over the world, often in partnership with tax administrations. This work leverages the availability of new data on the activities of multinational companies (such as country-by-country reports) and the offshore wealth of households (from the automatic exchange of bank information) created by the policy initiatives of the last decade.

The report aims to uncover positive evolution worth celebrating, but also setbacks, and major issues that remain unaddressed.

Tax evasion falls

The report says:

• Offshore tax evasion by wealthy individuals has shrunk. Thanks to the automatic exchange of bank information, offshore tax evasion is estimated to have declined by a factor of about three over the last 10 years. This success shows that rapid progress can be made against tax evasion if there is the political will to do so.

• The global minimum tax of 15% on multinationals, which raised high hopes in 2021, has been dramatically weakened. Initially expected to increase global corporate tax revenues by close to 10%, a growing list of loopholes has reduced its expected revenues by a factor of 2 (and by a factor of 3 relative to a comprehensive minimum tax of 20%).

• Tax evasion – including grey-zone evasion at the border of legality – is increasingly happening domestically.

“A key message of this report is that tax evasion is not a law of nature but a policy choice. As interconnected nations we can choose free-for-all policies that allow it to fester, or we can choose coordination to curb it. It is also possible to make major progress through unilateral action, should ambitious global agreement fail,” the report notes.

The report says that offshore tax evasion has declined by a factor of about three in less than 10 years. Before 2013, households owned the equivalent of 10% of world GDP in financial wealth in tax havens globally, the bulk of which was undeclared to tax authorities and belonged to high-net-worth individuals. Today, there is still the equivalent of 10% of world GDP in offshore household financial wealth, but in our central scenario only about 25% of it evades taxation. This reduction in non-compliance is a major success that shows that rapid progress can be made against tax evasion if there is the political will to do so.

Despite this progress, some offshore tax evasion remains, due to two main issues. First, it remains possible to own financial assets that escape being reported on, whether it’s due to noncompliance by offshore financial institutions or to limitations in the design of the automatic exchange of bank information. Many offshore financial institutions duly comply with their requirements, but others may fall short, for fear of losing their customer base and facing no real threat from foreign tax authorities. Second, not all assets are covered by the automatic exchange of bank information. Recent research highlights how some individuals who used to hide financial assets in offshore banks have exploited these loopholes by shifting holdings to non-covered assets, most importantly real estate.

Tax Havens

A persistently large amount of profits is shifted to tax havens: $1 trillion in 2022. This is the equivalent of 35% of all the profits booked by multinational companies outside of their headquarter country. The corporate tax revenue losses caused by this shifting are significant, the equivalent of nearly 10% of corporate tax revenues collected globally. US multinationals are responsible for about 40% of global profit shifting, and Continental European countries appear to be the most affected by this evasion.

In 2021, more than 140 countries and territories agreed to implement a pioneering minimum tax of 15% on multinational profits. This is a landmark development: it is the first time that an international agreement puts a floor to how low certain taxes on profits can go. However, since the political agreement, the global minimum has been dramatically weakened by a growing list of loopholes.

The report makes six recommendations to reduce the tax deficit of multinational companies and wealthy individuals. The tax deficits are the difference between what these actors pay in taxes today and what they would pay if minimum taxes were well enforced. Reducing the tax deficits of multinationals and wealthy individuals can not only generate large amounts of government revenue, but also contribute to increasing the social sustainability of globalisation.

The report’s proposals are the following:

1. Reform the international agreement on minimum corporate taxation to implement a rate of 25% and remove the loophole in it that foster tax competition.

2. Introduce a new global minimum tax for the world’s billionaires equal to 2% of their wealth.

3. Institute mechanisms to tax wealthy people who have been long-term residents in a country and choose to move to a low-tax country.

4. Implement unilateral measures to collect some of the tax deficits of multinational companies and billionaires in case global agreements on these issues fail.

5. Move towards the creation of a Global Asset Registry to better fight tax evasion.

6. Strengthen the application of economic substance and anti-abuse rules.