Why have countries moved away from wealth taxes?

From the excellent Timothy Taylor:

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: “Overall … from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes.”

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth…

It’s interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: “In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland … Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries …” However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren’t worth the bother. In addition, it suggests that a US wealth tax which doesn’t kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

There are many more excellent points at the link.  Here is another:

A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial.

Tim concludes:

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals.

Recommended.  If you would like another point of view, Saez and Zucman respond to some criticisms here.


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