It’s become fashionable in progressive circles to kick around various versions of a wealth tax. From the comprehensive wealth taxes proposed by Elizabeth Warren and Bernie Sanders to proposed taxes on various forms of wealth like mark-to-market capital gains taxes and “billionaire’s taxes,” wealth taxes are fast becoming the left’s white whale of tax policy. But in their single-minded pursuit, progressives have often ignored wealth taxes’ potential to sink the boat.
A recent report on Norway’s experience with its own wealth tax found that ever-increasing taxes on the wealthy have consequences. In the wake of a recent increase in Norway’s wealth tax rate up to a maximum of 1.3 percent, the country lost 30 billionaires and multimillionaires, more than had fled the country in the previous 13 years. This includes the highest-taxed Norwegian last year.
If a 1.3 percent tax rate does not sound very high, remember that wealth tax rates are not comparable to taxes that Americans are used to paying, as they target the entirety of an individual’s wealth rather than just a subset.
For example, imagine you hold shares of a Dow Jones index fund. Since a year ago, those shares have appreciated by about 1.45 percent. If you had to pay a 1.3 percent wealth tax rate on a 1.45 percent capital gain, it would be equivalent to about a 90 percent capital gains tax rate.
Even that makes the picture a bit rosier than it is, as not all components of an individual’s wealth gain value in a given year. Wealth taxes are indifferent to that fact, meaning that taxpayers can be left in situations where they are forced to pay taxes on assets that saw a negative return in that year.
One other aspect of Norway’s wealth tax that its American admirers often fail to mention is who pays it. Norway’s wealth tax targets all single Norwegians with a net worth of about $150,000, or married Norwegians with a net worth of around $300,000. If a similar wealth tax were implemented in the United States, just owning a substantial portion of home equity would be enough to push a taxpayer into the wealth tax bracket. That’s a middle-class tax, not one targeted at the ultra-wealthy.
Even so, Norway derives a relatively small amount of tax revenue from its wealth tax, just around 1 percent of total revenue. That’s in part because Norwegians keep fleeing it, but far more because wealth taxes are notoriously difficult to administer and enforce. Combatting wealth tax avoidance requires armies of expensive tax enforcement agents, and valuing non-liquid assets is notoriously difficult.
Rather than raking in vast sums of tax revenue, European countries like Norway have often found that they end up bogged down in endless legal battles over asset valuation or with their citizens running for the hills. It’s for this reason that most of the rest of the developed world has been moving away from wealth taxes, not towards them.
The United States should learn from Norway’s mistakes, not seek to repeat them. Wealth taxes are economically harmful, nearly impossible to effectively administer, and often don’t even end up raising the promised revenue. They’re best left in Europe.
