The economic argument against wealth taxation is very straightforward.
Such a levy is akin to a very high marginal tax rate on saving and investment.
Indeed, it’s quite possible that the effective tax rate would exceed 100 percent.
That definitely penalizes capital formation, which ultimately means workers will earn less money.
There’s also a practical argument against wealth taxation, which is based on the daunting challenge of revaluing assets every year.
There’s a competitiveness argument as well, and that’s our topic today.
Simply stated, rich people are not sheep, patiently waiting to be sheared. If their fiscal torture is too extreme, they will leave.
And this is not just theorizing.
In an article for the U.K.-based Telegraph, Charlotte Gifford reports on how Norway’s higher wealth tax is backfiring.
Mr Røkke, an industrial tycoon with an estimated net worth of Nkr 19.6bn (£1.5bn), is among 50 billionaires and millionaires to have left Norway over the past year as they were hit with higher rates of wealth tax. Record numbers of the country’s richest residents have fled since the Labour-centre coalition increased wealth tax rates by 0.1 percentage points, costing the government tens of millions in lost tax revenue. …It is expected that even more wealthy Norwegians will leave because of the tax raid which kicked in last November. …In 1990, 12 OECD countries, all in Europe, levied wealth taxes. However, most of them repealed these in the 1990s and 2000s due to growing fears that in a globalised world the wealthy would simply take their riches elsewhere. France was the last to scrap its wealth tax in 2017, after losing an estimated 60,000 millionaires between 2000 and 2016… Other wealthy individuals who have recently abandoned Norway include Tore Ivar Slettemoen, co-founder of battery company Feyr, and Ninja Tollefsen, daughter of property investor Ivar Tollefsen. Fredrik Haga, 31-year-old co-founder of cryptocurrency data business Dune, has also gone to Switzerland. Mr Haga, who has most of his wealth tied up in the rapidly growing company, told the Financial Times that he was worried his next tax bill would be several times his disposable income. …The OECD has warned that wealth taxes have a negative impact on long-term growth, damaging entrepreneurship and risk-taking.
I applaud these people for protecting their family assets from greedy politicians.
But let’s focus on some practical issues. There are three important takeaways from the above excerpts.
- The higher wealth tax almost surely is losing revenue because the geese with the golden eggs are flying away.
- It is possible to have effective tax rates of more than 100 percent on annual disposable income.
- Even some leftists – such as French politicians and OECD bureaucrats – realize wealth taxes are foolish.
Unfortunately, it does not seems that Norwegian politicians will undo their mistake. Indeed, they are even contemplating an awful U.S.-style exit tax.
In a desperate attempt to stop high taxpayers leaving the country, Norway has said it is investigating the possibility of an “exit tax” where individuals are taxed on saved capital income the moment they move out of the country.
Norway is not a member of the European Union, but it does have agreements to mirror many E.U. policies. Hopefully the rules of freedom of movement would preclude any sort of exit tax.
P.S. Surprisingly, Switzerland has a wealth tax, though at least that bad levy is a replacement for alternate bad policies such as capital gains taxation.
P.P.S. On the other end of the spectrum, Spain is compounding the damage of wealth taxation by imposing a second wealth tax!
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Image credit: Jim Nix | CC BY-NC-SA 2.0.
