Advanced economies struggle to close tax gap amid growing debt

(MENAFN) Centuries after Jean-Baptiste Colbert, the finance minister of Louis XIV, famously compared taxation to plucking a goose to get the most feathers with the least noise, this analogy still resonates with modern governments. Advanced economies around the world are now grappling with soaring public debt, rising interest payments, and escalating demand for public services in the wake of the pandemic. These financial pressures are compelling governments to seek new sources of tax revenue beyond relying solely on economic growth, which is proving insufficient to bridge the gap between current revenues and the burgeoning fiscal demands. As a result, they are intensifying efforts to extract more taxes from affluent individuals, tax evaders, and multinational corporations—often seen as the ripest "geese" for plucking.

Several governments have already started implementing measures aimed at these wealthier groups. For instance, Italy recently doubled the foreign income tax for its super-rich expatriates, reflecting a broader trend of targeting high-net-worth individuals who hold assets overseas. Similarly, the UK’s Chancellor of the Exchequer, Rachel Reeves-Illo, has announced plans to scrap the “non-resident” tax system, increase taxes on the private equity sector, and introduce tougher measures to combat tax evasion. These strategies align with a growing interest among politicians in both the United States and the European Union in exploring the potential of wealth taxes as a tool for raising much-needed revenue. However, while targeting the wealthy and large corporations has clear political appeal, especially among voters who feel economic inequality has widened, the approach carries significant risks in a globalized economy where capital and people are highly mobile.

There is concern that excessive taxation on the wealthy and large corporations could backfire, leading to an exodus of these groups to jurisdictions with more favorable tax regimes. According to UBS, the UK is projected to lose more millionaires than any other country by 2028, underscoring the potential downside of aggressive tax policies. Thus, while targeting the rich and large businesses might seem an attractive option, these measures must be carefully calibrated to avoid shrinking the tax base as rates increase. Moreover, cash-strapped governments have other strategies at their disposal, such as focusing on narrowing the "tax gap"—the difference between taxes owed and taxes collected. For example, the UK’s tax gap for the 2022-23 financial year was estimated at £39.8 billion, highlighting a substantial opportunity for increasing revenue without imposing new taxes or raising existing rates. As governments seek to balance fiscal sustainability with economic competitiveness, they must navigate the complex trade-offs involved in tax policy to avoid unintended consequences. 

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