Why Wealth Taxes were Repealed in Europe

A wealth tax is an example of a policy that has a superficial appeal that dissolves when closely examined or when put into practice. Wealth is anything with a positive market value. Net wealth is wealth minus liabilities. Gross wealth does not subtract liabilities. Wealth can be tangible, such as real estate and jewels, or intangible, such as shares of stocks and bonds.

            Wealth is widely taxed when it is real estate and when an estate is transferred after death. Some politicians, such as Elizabeth Warren, have proposed a general wealth tax on the rich. Warren has proposed a 2% federal tax on a person’s net worth over $50 million, plus a 1% tax on every dollar in net worth over $1 billion.

            The problems with general taxes on wealth are economic, moral, and constitutional. The economic problem consists of disincentives, avoidance, and evasion. It would superficially seem that the rich would not miss having a bit of their wealth confiscated. But one does not become rich from not caring about money. One can better understand the disincentive effect by calculating an equivalent tax on the yield of wealth.

            Suppose the inflation-adjusted yield of bonds is 2%. A $100 bond would yield $2 per year. Now impose a 2% tax on wealth. That imposes a $2 tax on the bond’s market value. Thus what seems like a small tax on wealth is equivalent to a big 100% tax on the yield!

            The tax on wealth generates a disincentive to produce wealth. It also creates an incentive to avoid or evade the wealth tax, such as by transferring the wealth to tax shelters such as trusts, moving to foreign places, or hiding wealth in vaults and safe deposit boxes. Good luck to the tax collector in finding the diamonds!

            The moral problem is that the confiscation of wealth that is earned from labor imposes a government ownership on the labor and thus on the body and life of the worker. The moral issue can be solved by taxing unearned income, as described by the counterpoint article by Frank de Jong.

            The constitutional problem comes from there being no authority for a federal tax on wealth. The 16th Amendment recognizes the federal authority to tax income, while the original constitution required direct taxes, such as on wealth, to be levied in proportion to state population, not purely in proportion to wealth. However, a wealth tax would be Constitutional if confined to the residents of Washington DC.

            Evidently, European countries do not have this constitutional problem, and several of them did impose a tax on general wealth. As reported by Rosalsky, in 1990, twelve European countries levied a wealth tax. Today, there are three: Norway, Spain, Switzerland. France’s wealth tax, implemented in 1982, resulted in an exodus of 42,000 millionaires between 2000 and 2012. The tax was repealed in 2017.  The Swiss tax is decentralized, levied by the cantons, and self-reported.

            The years the European wealth taxes were introduced and then repealed are shown on the referenced article by Chris Edwards. As one example, “Sweden repealed its wealth tax in 2007 as it became clear that it was driving business people—such as the founder of Ikea, Ingvar Kamprad—out of the country.

            A tax on real estate requires the assessment or appraisal of the property value. This can be complex, especially in valuing the building, but at least the property is visible and immobile. The taxation of general wealth is much more difficult and costly. How much is a stamp collection worth? One has to value the individual stamps. The high cost of enforcement induced Austria to repeal its wealth tax in 1993. The European countries found that the tax on wealth raised little revenue. European wealth taxes collected only 0.2% of GDP in revenues.

            The US federal income tax is levied on Americans even when they live abroad. A wealth tax could do the same, avoiding the French problem. Warren’s plan would include a stiff exit tax on those who renounce US citizenship – 40 percent of a person’s wealth over $50 million. But a high exit tax makes U.,S. citizenship that much less voluntary. Moreover, as Edwards states, “The Internal Revenue Service would be charged with the impossible task of auditing everything affected U.S. residents owned on a global basis and judging whether the valuations on all those foreign assets were fair.”

            The same troubles were experienced by other countries. As Edwards states, “India enacted an annual wealth tax in 1957 and repealed it in 2015. Indian finance minister Arun Jaitely described reasons for his government’s scrapping of the tax …:’The practical experience has been it’s a high cost and a low yield tax.’ The Indian wealth tax became riddled with exemptions, it was evaded, and it raised little revenue.”

            Tax avoidance is enhanced by exemptions. As Edwards states, “Farm and small business assets were often exempted over concerns about entrepreneurship. Pension assets were exempted over concerns about fairness. Artwork and antiques were exempted because of difficulties in valuation and worries about the break-up of collections. Forest lands were exempted for environmental reasons. Nonprofit organizations and intellectual property rights were often exempted. The French wealth tax exempted stocks of wine and brandy. Over time, taxpayers shifted their wealth into exempted assets and tax bases shrank.”

            Instead of directly taxing wealth, it is Constitutional to levy a tax on the purchase of some types of wealth. Such an excise tax was levied in 1991, a ten-percent tax on luxuries such as yachts. The rich responded by reducing their purchase of yachts, airplanes, fancy cars, and other luxuries. The tax contributed “to the general devastation of the American boating industry — as well as the jewelers, furriers and private-plane manufacturers that were also targets of the excise tax,” The tax on yachts was repealed in 1993.

            Since superficial appeal is stronger than logic or evidence, we most likely have not seen the end of attempts to impose a U.S. wealth tax. As the German philosopher Hegel wrote in the introduction to his Philosophy of History, “What experience and history teaches us is that people and governments have never learned anything from history, or acted on principles deduced from it.”      

References

Edwards, Chris. 2019. “Taxing Wealth and Capital Income.” Cato, Tax and Budget Bulletin no. 85, Aug. 1. <https://www.cato.org/tax-budget-bulletin/taxing-wealth-capital-income>

Glassman, James. 1993. “How to Sink an Industry and Not Soak the Rich.” The Washington Post, July 16. <https://www.washingtonpost.com/archive/business/1993/07/16/how-to-sink-an-industry-and-not-soak-the-rich/08ea5310-4a4b-4674-ab88-fad8c42cf55b/>

Rosalsky, Greg. 2019. “If a Wealth Tax is Such a Good Idea, Why Did Europe Kill Theirs?” Feb. 26.  <https://www.npr.org/sections/money/2019/02/26/698057356/if-a-wealth-tax-is-such-a-good-idea-why-did-europe-kill-theirs>

Zeballos-Roig, Joseph . 2019.“4 European countries still have a wealth tax. Here’s how much success they’ve each had.” Insider, Nov 7. <https://www.businessinsider.com/4-european-countries-wealth-tax-spain-norway-switzerland-belgium-2019-11>

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *