The European Union’s Pursuit of a New Wealth Tax for Revenue Generation
The European Union (EU) is considering the implementation of a new wealth tax as a means to increase its revenue from internal sources. This tax would contribute to funding the EU budget and addressing the debt accumulated to support the post-pandemic economic recovery. However, it is worth noting that many EU member countries have abolished their net wealth taxes in the past few decades, recognizing the adverse effects these taxes had on entrepreneurship, innovation, and long-term economic growth.
A Citizens’ Initiative Sparks Discussion on Wealth Tax Proposal
Recently, a European citizens’ initiative (ECI) successfully obtained the required seven signatures to petition the European Commission to consider a legislative proposal for a wealth tax targeting high-income individuals within the EU. Once the ECI is officially registered, the initiators have one year to collect one million signatures. Following this, the European Commission would assess the proposal and provide a formal response, though it is not obligated to propose new regulations.
This initiative stemmed from a panel discussion organized by the EU Tax Observatory, which explored various wealth tax proposals.
Criticisms Highlighting Current Shortcomings of Wealth Taxes
During the panel discussion, participants highlighted several shortcomings of existing wealth taxes. Florian Scheuer, an esteemed economics professor at the University of Zurich, pointed out that Switzerland’s net wealth tax imposes a burden on a wider range of individuals beyond the ultra-wealthy due to low thresholds. Gabriel Zucman, director of the EU Tax Observatory, criticized wealth taxes for their failure to adequately cover financial assets, resulting in insufficient taxation of the wealthiest individuals. Other speakers emphasized the administrative burdens associated with assessing tax bases regularly and the challenges in enforcing national-level wealth taxes as capital becomes increasingly mobile.
Kristoffer Berg, a research fellow at the Oxford University Centre for Business Taxation, suggested that in contexts with significant unrealized capital gains, wealth taxes could encourage wealthy individuals to realize those gains. In such cases, a broad wealth tax encompassing various asset types and wealth levels, coupled with a low tax rate, would be most effective. Additionally, an Oxfam tax policy advisor emphasized the importance of focusing on the wealthiest individuals when designing such tax policies.
Understanding Wealth Tax Trends in Developed Countries
The discussions surrounding the proposed wealth tax for the European Union have paid little attention to the current trends in wealth taxation across developed countries. However, analyzing these trends and the present state of wealth taxes in OECD countries can provide valuable context for evaluating the EU’s proposal.
Declining Prevalence of Net Wealth Taxes
Since 1965, thirteen OECD countries had implemented net wealth taxes. However, by 2023, this number had decreased to just four countries: Colombia, Norway, Spain, and Switzerland. Governments increasingly recognize the detrimental economic impacts associated with wealth taxes, leading to their repeal. According to OECD data, the countries that generated revenues from net wealth taxes on individuals in 2021 were Colombia, France (currently limited to real estate tax), Norway, Spain, and Switzerland. On average, these five countries’ net wealth tax revenues accounted for a mere 1.2 percent of their total revenues in 2021, with Switzerland leading at 4.03 percent.
Conflicting Effects on Entrepreneurship and Investment
An OECD report reveals that wealth taxes can discourage entrepreneurship, leading to reduced innovation and long-term economic growth. However, it also suggests that net wealth taxes could incentivize investment and risk-taking. The argument posits that entrepreneurs, faced with eroded after-tax returns due to wealth taxes, may engage in even riskier ventures to maximize potential returns. Nevertheless, relying on wealth taxes to promote risk-taking proves inefficient since wealthy individuals may opt to increase their consumption to diminish their overall wealth.
Another recent study delves into a different mechanism through which wealth taxes impact corporate financial policies. The research indicates a significant increase in dividend payouts when substantial stock price growth coincides with individual wealth taxes. This trend is particularly pronounced among closely held companies. As stock prices surge, increasing the wealth tax burden on controlling shareholders, these individuals may prompt companies to distribute larger dividends. However, such sizable dividend payouts correlate with lower levels of subsequent investment.
Recent Developments and Repeals Reflecting Economic Impacts
Over time, numerous countries have repealed their net wealth taxes due to various factors, including their economic consequences. France’s Finance Minister, Bruno LeMaire, clarified that the partial repeal of the wealth tax in France formed part of a comprehensive reform package aimed at attracting more foreign investment. This package also involved a gradual reduction in the corporate tax rate, implemented over several years.
Recent wealth tax developments in Europe have prompted Spain’s regional governments to challenge a new “solidarity wealth tax” before the Constitutional Court, and Norway has introduced an increased exit tax as billionaires seek to relocate. A tax expert at Civita, a Norwegian think tank, reinforced the notion that wealth taxes distort business decisions by forcing owners to request substantial dividends, sometimes surpassing profits. This circumstance substantially reduces the motivation to invest in companies. Notably, even the local government in Geneva, Switzerland, expressed opposition to an additional “solidarity” levy on individuals possessing assets exceeding 3 million francs ($3.4 million), and voters rejected the increase.
Given the limited revenue generated by wealth taxes and their potential to discourage entrepreneurship and investment, it may be prudent for European countries to consider repealing them instead of implementing a widespread wealth tax across the entire continent.