In most democracies around the world, you probably pay less income tax as a high school teacher than as a lawyer or banker.

This is what we call ‘progressive’ taxation, and it intuitively makes sense to many of us: the more you earn, the more you pay, proportionally.

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For much of the twentieth century, this principle appeared to hold true. Nominal tax rates were steeply progressive, and the promise of the strongest shoulders bearing the heaviest burdens seemed intact.

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However, recent research has uncovered a troubling reality: the promise of progressive taxation has broken down.

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Over the past few decades, the wealthiest individuals in the world have not only become exponentially richer, but their wealth is increasingly derived from sources that the current income tax system fails to address. This is happening at the very top, where the progressive tax system should be at its strongest.

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The problem of ineffective taxation of the ultrarich is a double-edged sword: not only are we missing out on resources we need to build the society we want, but we’re also allowing a small group to accumulate wealth and power that threatens the foundations of our democracy.

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Reversing this trend will require a global effort. The good news: it is possible — nothing about the extreme wealth disparities we see today is inevitable. First, though, we must confront the fact that our ideal of progressive taxation has collapsed. Next, we need to build a movement that can restore fairness to our tax systems.

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Progressive up to a point

If we take a look at the numbers, we notice something strange: our tax system looks progressive, up to a certain point of wealth. Then, the tax burden we place on individuals drops off a cliff.

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Research by the economist Gabriel Zucman and his colleagues has shed light on the effective tax rates of the richest people in the world: the actual percentage of income paid in taxes after deductions and loopholes. For instance, in 2018, America's top billionaires paid just 23% of their income in taxes, while billionaires had a lower effective tax rate than working-class Americans.

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This pattern holds true across various countries. In the Netherlands, for example, the average taxpayer in 2016 contributed 45% of their earnings to the government, while billionaires paid just 17%.

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This wasn’t always the case. In the 1960s, the 400 richest Americans paid more than half of their income in taxes. However, this issue has escalated dramatically since the 1980s, fueled by the explosion of wealth driven by globalization and the rise of the internet.

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As the graph indicates, we’re not talking about upper-middle-class earners here. Depending on the country, it’s generally the wealthiest 0.1% — whose wealth far surpasses that of the rest of society — who manage to avoid paying their fair share of taxes. In short, we’re talking about a small group of billionaires who have found a way to sidestep the standard norms of taxation.

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Why taxing the rich is so hard

It’s easy to chant “Tax the rich!”

It’s much harder to design a system that actually taxes them.

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That’s why The School for Moral Ambition enlisted the help of a small team of tax experts, led by former tax advisor and Tilburg University lecturer Auke Lamers. Auke explains that taxing the wealthiest is far more complex than taxing the rest of us.

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“The problem is that not everyone generates income in the same way,” Auke says. “For you and me, we earn a salary, and it’s generally taxed progressively. But when you look at the ultra-wealthy, they own a lot of assets like stocks. Their income consists mostly of wealth growth, not active income such as salary. This wealth growth is also a form of income, economically seen, but it’s not treated as such by income tax laws.”

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In short, the ultrarich don’t derive their income from sources we can easily tax. As a result, billionaires’ reported incomes are often surprisingly low.

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Take Jeff Bezos. Between 2006 and 2018, his wealth increased by a whopping $127 billion, according to Forbes. However, reporting by ProPublica's has shown that during this period, Bezos reported just $6.5 billion in taxable income. While the $1.4 billion he paid in federal taxes sounds substantial, it only amounts to a 1.1% effective tax rate on the growth of his wealth.

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There’s a reason this tax structure exists: for most of us, “unrealized gains” — assets that increase in value but haven’t been sold — aren’t considered income, because we can’t use them to buy goods or services unless we sell them. We pay taxes when the shares are sold, not when their value increases.

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For the ultra-wealthy, however, the ability to delay taxation opens up endless financial opportunities. “As a wealthy person, even though your assets don’t immediately turn into liquid funds, they still have direct practical value,” Auke explains. “You can use them as collateral, easily obtaining cash or loans. For instance, you go to the bank, use your stocks as security, and get a loan. So with that kind of wealth, you can turn your wealth into liquidity without directly selling anything. This is how Elon Musk bought Twitter for example, without paying tax like most of us would have to. ”

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This legal distinction between wealth growth and taxable income becomes a massive loophole when scaled up to billionaire portfolios. It allows the ultra wealthy to access massive financial resources with ease, escaping the immediate tax obligations that most of us face.

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The real-world costs of tax inequality

You might ask: is it really such a bad thing that a handful of people contribute less than they should?

The case for taxation is often framed as a matter of redistribution: taxing the rich to help the poor. However, there's another aspect to consider — we're missing out on the resources necessary to build the society we want to live in. According to Gabriel Zucman’s proposal, a tax on billionaires could raise up to $250 billion annually, funds that could be invested in critical public goods like healthcare, clean energy, and infrastructure.

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And there’s an even more concerning consequence of uncontrolled wealth inequality: the (political) influence of untaxed wealth.

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Rich individuals like Elon Musk can buy influential media platforms and other assets, consolidating their power and making it harder to challenge their influence. This concentration of power in the hands of a few undermines democratic processes.

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Finally, when the wealthiest don’t carry their fair share of the burden, public trust in tax systems erodes. Why would anyone pay taxes when the ultra-rich barely do? This so-called ‘tax morale’ is a fragile thing, and when the system is perceived as unfair, it weakens the very foundation of social cohesion.

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Three levers for realizing fair taxation

We know that wealth accumulation, particularly in the hands of a few, is not inevitable. There are steps we can take to reverse the growing inequality and build a more equitable tax system.

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In their research, Auke and his team identified several promising policy tracks that a Tax Fairness Movement can focus on to make real progress. "Most experts agree there is no silver bullet solution," says Auke, "but there are realistic and achievable actions we can take to address this issue."

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After consulting with experts and reviewing the scientific literature, Auke's team pinpointed three key areas where this movement can make an impact in the coming years.

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“We need to show that it’s possible to make progress on this issue.”

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First, countries around the world — through groups like the G20, OECD, UN, and EU — could work towards a minimum effective tax standard for ultra-high-net-worth individuals. 

Auke explains: “You can try to have countries make agreements among themselves on a global or regional basis to ensure a coordinated approach to the problem. This would help ensure that the wealthiest individuals contribute a fair share of taxes, regardless of the country they reside in.”

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Second, a pioneering country could take the lead by implementing tax reforms for the wealthy, setting a strong precedent for others to follow.

"We need to show that it’s possible and that progress can be made on this issue," Auke adds. “France for example, is currently making important strides in this area and serves as a positive example.”

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Lastly, we need to enhance transparency and improve (international) data sharing on wealth and assets. This includes better enforcement mechanisms and the creation of more comprehensive registers that detail assets and so-called ‘ultimate beneficial owners’, particularly for asset categories that are not yet well-regulated, such as crypto and real estate.

As Auke highlights: "We have to also confront the persistent issue of tax evasion — individuals failing to report their wealth and income. To tackle this, we need improved information exchange and more comprehensive registers."

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The start of a movement

Perhaps most importantly, we need to build a movement that makes fair taxation and wealth redistribution a cause that people care deeply about.

For too long, the narrative has been shaped by those who benefit from the status quo — the ultra-wealthy — convincing us that taxes are always good for everyone except them. Meanwhile, they use armies of lawyers and consultants to avoid paying their fair share in taxes.

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Critics often point to concerns like capital flight — the idea that the wealthy will simply relocate to countries with more favorable tax rules — or the administrative burden of implementing wealth taxes. While these are legitimate concerns, they have the effect of maintaining a system that is becoming increasingly untenable.

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“These are complex and time-consuming processes, so we have to start sooner rather than later.”

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Change is beginning to take root. In Brazil, President Luiz Inácio Lula da Silva's government has proposed a 2% annual wealth tax on individuals with assets exceeding $1 billion. France, under Prime Minister Michel Barnier, is also moving towards higher taxes for the wealthy. Barnier has indicated plans to increase taxes on high earners, reversing previous tax cuts and aiming to reduce the country's substantial debt. And at the G20 summit in 2024, leaders agreed to work on a global standard for taxing the super-rich, marking the first serious international effort towards equitable tax systems.

Auke warns, however, that we can't afford to wait too long: "These are complex and time-consuming international political processes, so we have to start sooner rather than later."

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The Tax Fairness Movement will require perseverance and long-term commitment, working for many years to achieve its goals. We know this will be a marathon, but we also understand the time to start is now — because the longer we wait, the wider the gap between the wealthiest and the rest of us will grow.

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The Tax Fairness Fellowship research team at The School for Moral Ambition is made up of Auke Lamers, Kees-Arjen Heineken, and Josephine van der Have.

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Ready to dedicate your career to Tax Fairness? You can express your interest in our Tax Fairness Fellowship now. Learn more here.

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