‘Tax our extreme wealth’

It would do the Philippines good if our economic managers take to heart the emerging key messages at the World Economic Forum at Davos. One is the advice of the IMF Managing Director Kristalina Georgieva to “stay in the middle of realism that seems to serve the world well.” From our standpoint, this is no different from duly recognizing the upside risks to economic growth, its duality no less.

True, she kindled optimism at Davos as she counted the reasons why the world could be more hopeful. Georgieva argued that inflation has started to show some downtrend. With better prospects for China’s economy, global growth may be expected at 2.7% with stronger labor markets leading to higher consumer spending and sustained business activities.

But she must also have been the voice of reason at Davos where she talked about “Global Economic Outlook: Is this the End of an Era?” She pleaded for caution because the expected 2.7% global growth is really far from spectacular. The Fund chief stressed that it is the third lowest growth performance in the last decades after the global financial crisis and the pandemic. Promising as it is, any resurgence in the Chinese economy could also strike on the inflation side through higher demand for, and prices of, oil and gas. Inflation is likely to rebound.

If this is any guide, Michael Pettis of GlobalSource Partners reported two days ago that China grew by 5.2% in 2023 exceeding its target, but “not without a sharp increase in investment and an even sharper increase in the country’s debt burden.” This is reminiscent of the growth strategy of many highly indebted Latin American countries and Asian emerging markets in the 1980s and 1990s. Pettis warned that 2024 is going to be a tough year because Beijing could achieve a 5% GDP growth target through a higher level of wasted investment, an over-reliance on trade surpluses, and a rapid accumulation of debt. Over time, this is not exactly auspicious for the region and the global economy.

In fact, the other day, Hong Kong stocks dropped by more than 4% upon the data release of China’s lowest growth in three decades outside the pandemic years. This pessimism was also felt across Asia, exacerbated by the possible delay in the expected reversal of US Fed monetary policy.

It was also correct for Georgieva to raise the specter of Ukraine as a continuing major risk to both growth and inflation, something that seems to be disappearing from the risk assessment of many forecasters. This actually reduces the likelihood of stronger global growth for obvious reasons. The military and political backdrop could be seriously threatening.

The Fund’s summation: “It is less bad than we feared a couple of months ago — but less bad doesn’t quite yet mean good.”

Our local authorities may choose to be more careful in giving the impression that we have absolutely turned the corner and we can now afford to be dovish and start slashing interest rates. Our people would demand a receipt. For the monetary authorities, the Fund suggests to “stay put.”

The other reason for more circumspection with our prognosis is Georgieva’s thesis about the “price of fragmentation” in her article in the September-October 2023 issue of Foreign Affairs. World cooperation has weakened when it is more needed today. Protectionism and decoupling could be costly when economic activities should be expanded beyond national and regional territories. Otherwise, global financial safety nets might have to be activated while adequately resourcing international financial institutions like the World Bank and the Fund.

Her message was completed right at Davos when she focused on the “danger of fragmentation.” This time around, global fragmentation of trade might likely slow or even reverse global economic recovery. The IMF advice is to be pragmatic and collaborative. This is the right thing. The global economy should remain integrated. Otherwise, the cost of adjusting to global fragmentation could be 0.2% of GDP, if sufficient diversification is done. If global trade is trashed, the costs could be as high as 7% loss of GDP or around $7 trillion.

The other value of Davos for our economic managers and local business elite is the open letter of the world’s richest individuals and corporates to the Forum. There were 250 billionaires and millionaires, and they challenged the elected representatives of the world’s leading economies: “Tax our extreme wealth.”

As reported by CNBC, the open letter came after Oxfam reported that the world’s five richest men have more than doubled their vast wealth since 2020. With this rate of wealth accumulation, the globe could have the first trillionaire in 10 years.

Not a surprise here because the wealthy letter writers reminded the government attendees of their failure to respond to their suggestion for the authorities to tax their extreme wealth in the last three years! Coming from them, we can be assured that taxing them “will not fundamentally alter our standard of living, nor deprive our children, nor harm our nations’ economic growth.” They asserted that wealth tax “will turn extreme and unproductive private wealth into an investment for our common democratic future.”

The letter was entitled “Proud to Pay More” and contained the signatures of the wealthiest individuals and families from 17 countries including Walt Disney heir Abigail Disney, screenwriter Simon Pegg, and Valerie Rockefeller, another heir to billions of dollars. This attempt to help mitigate poverty and unequal distribution of income is far from an isolated case of epiphany.

A survey done by London-based Survation shows that of the 2,300 wealthy individuals with at least $1 million in investible assets minus their homes, or the richest 5% in G20 member nations, some 74% of them support higher taxes on wealth to mitigate the cost-of-living crisis and improve public services. Three-quarters of the respondents were in favor of a 2% wealth tax on billionaires and 54% believe extreme wealth concentration constitutes a threat to democracy.

Call it self-preservation, or self-interest, but this makes sense.

Ms. Disney in fact advised her kind that “Throughout history, pitchforks were the inevitable consequence of extreme discontent, but today, the masses are turning to populism, which is on the rise throughout the world. It is happening here.”

The concept is not exactly new in the Philippines. Early last year, Albay Rep. Joey Salceda himself filed a bill to tax the rich more. But House Bill 6993 limits its potency to simply increasing the tax rate of an expanded list of non-essential goods to a higher 25%. But such a tax would only modify the spending habits of consumers with no significant marginal tax gains.

A stronger version was earlier filed in 2021 by the Makabayan block in the Lower House to collect a wealth tax for people with taxable assets worth over P1 billion. The proposed schedule was quite progressive: those with over P1 billion in assets are to pay 1% in additional taxes; those with over P2 billion, 2%; and those with over P3 billion, 3%.

The Makabayan bloc’s argument is analogous to the Davos letter. Yes, those who wield power and wealth are the trailblazers in business activities that produce jobs and economic opportunities, that taxing them more could drive them away to countries with lower tax rates. Higher progressive tax rates are claimed to be a deterrent to more investments. But a progressive wealth tax that helps shift the burden away from those who can least afford to contribute to society to those who have the means to do it can help avoid a more serious outburst of social anger.

The issue clearly transcends sustaining investments. With poverty and joblessness, and the weak purchasing power of the working class in the Philippines, it is upholding equality and justice. It helps ensure the survival of our institutions.

Forbes’ latest report on the 50 richest in the country illustrates how the wealthiest among us could easily afford a wealth tax. Their net worth rose by nearly 13% from 2022 to 2023 and if they were taxed, as Ibon Foundation estimated, the Government would have collected some P260 billion enough to fund the needs of small farms and businesses and further bolster economic growth. The setback would not have even made a dent on their previous level of net worth. If this is applied to the country’s other billionaires, we stand to gain an additional P500 billion. The aggregate is not small — around P760 billion translates into 13% of the national budget.

As Ms. Disney wisely concluded her point at Davos, “we already know the solution to protect our institutions and stabilize our country; it’s taxing extreme wealth. What we lack is the political fortitude to do it. Even millionaires and billionaires like me are saying it’s time. The elites gathering in Davos must take this crisis seriously.”

Well said, and we don’t think we need to add more.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.