May 11, 2023

The international experience of wealth taxes

The international experience of wealth taxes

The high-tax lobby is pushing for the introduction of a wealth tax. Recent headlines about massive capital flight caused by Norway's wealth tax have highlighted the foolishness of this approach. The Norwegian experience, however, is only one of a number.

More than a dozen European countries used to have wealth taxes, but nearly all of these nations scrapped them, including Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, the Netherlands, Luxembourg, and Sweden. Why?

Sweden had a wealth tax for almost 100 years before eliminating it in 2007. In the prior year revenue from the tax amounted to just 0.16% of GDP and its abolition had “virtually no effect” on government finances. The tax caused massive capital flight estimated at up to SKr1,500bn.

In 2017 France repealed its wealth tax, which had been in place since 1988 and yielded about 1.5% of total tax revenue in most years. It is calculated to have caused an annual fiscal shortfall of €7 billion, roughly double what it yielded in revenue.

Capital flight from France was huge. Around 10,000 millionaires left France in 2015 alone, seven thousand of those from Paris, about 6% of the city’s millionaires. GDP growth was reduced by 0.2% per annum and the tax burden from wealthy departing taxpayers was moved onto other taxpayers.

Germany scrapped its wealth tax in 1996, with very little effect on public finances as it raised only 0.8% of total revenues. German economists considering its reintroduction found it would reduce growth by 0.33%, investment by 10%, employment by 2% and tax revenue by €31bn.

Austria scrapped its wealth tax in 1993, citing "high administrative costs" and "the economic burden on Austrian enterprises." Finland abolished its wealth tax in 2006, a reform “motivated by the fact that the tax had an unfair impact on enterprises” noted an EU report.

It's not just European countries that have scrapped their wealth taxes. India enacted an annual wealth tax in 1957 and repealed it in 2015. Indian finance minister Arun Jaitely commented: “The practical experience has been it’s a high cost and a low yield tax.”

Of course the Labour Party in its 1974 manifesto pledged to “introduce an annual Wealth Tax on the rich; bring in a new tax on major transfers of personal wealth and heavily tax speculation in property – including a new tax on property companies.” None of this was done.

Former Labour Chancellor Dennis Healey later commented “We had committed ourselves to a wealth tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and the political hassle".

But what about the three European countries which still have wealth taxes: Norway, Spain, and Switzerland?

In Norway a small wealth tax increase caused 30 multimillionaires to emigrate in 2022, more than the total number of large taxpayers who left during the previous 13 years. Many more are expected to leave, but not to the UK where our tax environment & that for non-doms is unattractive compared to that of other countries.

For example, Tord Ueland Kolstad, a real estate and salmon farming investor with a fortune of around NOK 1.5 billion, has moved to Lucerne in Switzerland. He said that the higher wealth tax would cost him around NOK 6m, requiring him to pay himself a dividend of NOK 10m to account for the higher dividend tax. He would thus be taxed twice and have to reduce the capital in his business.

Billionaire Tord Ueland Kolstad is moving to Switzerland as a result of wealth taxes

“I think it is very stupid that we have a taxation system in Norway which means that those who invest all their capital in business development are taxed so heavily that they have to move out”, Kolstad said.

The Norwegian who paid most taxes last year, Kjell Inge Rokke, announced “I’ve chosen Lugano as my new residence, a great place with a central location in Europe… I am just a click away.” His departure will cost Norway NOK 175m per year in lost tax revenue. The increase in remote working is making it much easier to switch country, as his case demonstrates.

Fredrik Haga, 31-year-old co-founder of $1bn-valued crypto data business Dune, also moved to Switzerland. He said “I had to choose: am I based in Norway or do I want this company to succeed? It’s not about not wanting to pay taxes. It’s about paying taxes on money I don’t have.”

It distorts Norwegian business in all sorts of ways,” said Mathilde Fasting, a tax expert at think-tank Civita. “It forces owners to ask their companies for dividends, sometimes bigger than profits. It substantially increases the will not to invest in companies.”

Switzerland has had wealth taxes for centuries and these are currently levied by cantons, with rates varying from 0.13% to 1.1%. The taxes are partially voluntary, as financial wealth is self-reported. Studies found a 1% drop in the wealth tax rate raises reported wealth by 43%.

Swiss wealth taxes can be seen as a substitute for other taxes. Switzerland doesn't levy capital gains taxes and most cantons have abolished inheritance taxes to direct descendants. Income taxes are low. Foreign residents can avoid wealth taxes by paying a total tax lump sum.

Spain has a heavy wealth tax, reaching 3.5% of assets, which nevertheless brings in less than 1% of total tax revenue. Both the regions of Madrid and Andalucia have scrapped the wealth tax by providing 100% deductions. Galicia has a 50% deduction

Anadalucian President Moreno said the tax accounted for only 0.6% of the regional government’s annual income and was “an obstacle for investment." He says the tax reduction will attract 7,000 new residents. “We will exceed by far that 0.6% of income, through income and indirect taxes.”

The Spanish Government, comprised of socialists and communists, has just brought in a new "Solidarity tax on large fortunes", intended to cancel the effect of the regional wealth tax deductions. The regions that have scrapped the wealth tax are challenging the new tax's legality.

Wealth is the oxygen of capitalism

Switzerland has had wealth taxes for centuries and these are currently levied by cantons, with rates varying from 0.13% to 1.1%. The taxes are partially voluntary, as financial wealth is self-reported. Studies found a 1% drop in the wealth tax rate raises reported wealth by 43%.

While Swiss wealth taxes are an accepted part of their system, it is likely that the Spanish & Norwegian wealth taxes will soon be repealed once leftist governments lose power. Insignificant revenue raised, negative economic impact - the same flaws as other wealth taxes now scrapped.

Contrary to far left propaganda, the wealthy do not hoard money or spend it all on expensive champagne or fast cars. Most of their wealth is tied up in companies where it provides the capital that funds growth and that finances the R&D which produces better goods and services for consumers.

Wealth taxes lower capital stock by encouraging capital flight and discouraging new investment. High administration costs reduce revenue so much that they rarely yield more than 0.2% of GDP. Their wider effects reduce economic growth and lower wages, further depressing tax revenues.