In recent years, many politicians have been touting wealth taxes as a promising way to tax the super rich and make them pay their “fair share,” by no longer letting them supposedly get away with paying little or no tax. Are wealth taxes truly a fair and promising way to tax the super rich and combat inequality, or are they a false hope at fairly and successfully taxing those who generate a large sum of their wealth through asset appreciation?
After all, can’t someone worth millions of dollars afford to contribute a small percentage of their wealth to fund existing and new social programs? 1%, 2%, or 3% of their net worth exceeding an exorbitant threshold is simply crumbs to them, isn’t it? Unfortunately, it’s not quite that simple. In this article we will explore some of the ramifications of implementing a wealth tax, as well as some oversimplifications that I believe both policymakers and voters are falling victim to.
What is a wealth tax?
Unlike traditional taxes which collect a percentage of the income you earn (from employment, dividends, capital gains, etc.), a wealth tax is a tax on your net worth. This is calculated by taking the value of assets owned (such as cash, real estate, shares, art, jewellery, vehicles etc.) minus the value of debts owed. Wealth taxes are typically levied on the amount of an individual’s net worth exceeding a specific threshold, not on the entirety of their net worth.
Why should a given tax exist in the first place?
To avoid pursuing policies driven by ideology, below are two crucial reasons as to why I believe a given tax should exist or not. In this case, the tax at hand is a wealth tax, of course.
Reason #1 – Fairness
Fairness is of course subjective and really depends on your values and political beliefs; however, it is no less a crucial topic to consider when determining whether a given tax is “right” or “wrong” to be imposing.
When it comes to wealth taxes specifically, these taxes deviate considerably from the generally accepted principles of taxation in almost all countries. The main principle being that you pay tax on income that you earn, and you don’t pay tax on income that you haven’t earned. In other words, a wealth tax is a tax on perceived wealth that has been generated, not necessarily on money that somebody has earned and possesses.
In order for governments’ tax departments to evaluate an individual’s wealth to then levy a wealth tax, they have to make many assumptions that could very well end up being considerably inaccurate regarding the size of an individual’s wealth. Additionally, many of the taxpayers effected by a wealth tax are business owners who have most, or all of their wealth tied up in the value of their company. In other words, the value of their net worth is the value of their ownership. Up until they sell part or all of their company their net worth is purely hypothetical, meaning that this gain on their capital is “unrealized”. To have unrestricted access to this money and “realize” the gain, this would require selling ownership of the company. Norwegian entrepreneur Fredrik Haga (who left Norway due to their wealth tax) said the following regarding the Scandinavian nation’s recently increased wealth tax: “It’s not about not wanting to pay taxes. It’s about paying taxes on money I don’t have,” (Milne, 2022).
As described by Oxford Languages (n.d.), expropriation is “the action by the state or an authority of taking property from its owner for public use or benefit.” It is described a second time as “the action of dispossessing someone of property.” Wealth taxes I would argue, are expropriative given what paying a wealth tax could very likely entail. They threaten an individual’s ability to maintain ownership and control of their company or assets, by forcing them to take money out of their company or even sell ownership in their company or assets simply to pay the wealth tax. Unlike more common examples of expropriation in democratic countries (such as the fairly compensated forced sale of private land for infrastructure projects), an individual in this scenario would not be justly compensated for the sale of their company or assets.
Reason #2 – To increase government revenue
Typically, the entire point of a tax is to bring in revenue for the government to then reallocate with the general objective of improving the welfare of the populace. However, many argue that with a wealth tax (which threatens the very ownership of private property), economic incentives are distorted to an extent so large that it is not clear that wealth taxes even raise enough revenue to cover the opportunity cost and necessary administrative expenses. It is time consuming and expensive for a government to appraise the value of wealthy individuals’ often complex assets every single year. Additionally, there is the very real threat of those affected by a wealth tax choosing to relocate. After all, it would be reasonable to assume that those with the most money and resources are also the most able demographic to relocate if they are displeased with where they are living.
This was the case in France. Although France no longer has a true wealth tax (abolished in 2018 and replaced with a property tax on real estate wealth instead), they previously had a longstanding one dating back to 1988 (Pichet, 2008). As estimated by Pichet (2008), the decline in government revenue resulting from France’s wealth tax was roughly double the amount gained from it. Additionally, he estimates that France suffered an outflow of capital to the tune of €200 billion from when the wealth tax was first implemented in 1988 to the time of his journal article’s publication in 2007.
In other words, the French government lost thousands of their biggest taxpayers and had a net loss in government revenue from the tax. Now, it would not be entirely accurate to paint a picture that the wealthy individuals who left did so solely due to the wealth tax; however, it would be naive to assume that the jaw-dropping departure rates are not at least meaningfully attributable to the wealth tax or more generally to France’s high tax environment.
Final thoughts
Legitimate attempts to combat vast wealth inequalities should be commemorated and explored, but policymakers should also be realistic and cautious about the effectiveness of their policy proposals. Next time a politician touts a wealth tax as part of their political platform, remember that the issues relating to fairness, government revenue, and tax flight are inseparable from the presence of a wealth tax. My suspicion is that the proposed wealth tax then may not seem as attractive as it did at first glance.
References:
Milne, R. (2022). Rich Norwegians flee to low-tax Switzerland as wealth levy bites. Financial Times. https://www.ft.com/content/ca33dc93-78c0-4d7a-a647-cde18ab6a1fd
Oxford Languages. (n.d.). Expropriation. https://www.google.com/search?client=firefox-b-d&q=expropriation+meaning
Pichet, E. (2008). The Economic Consequences of the French Wealth Tax. La Revue de Droit Fiscal, Vol. 14, p. 5, April 2007. https://ssrn.com/abstract=1268381