Wealth taxes are being floated as a post-pandemic option to raise revenue and address inequality. A common objection is that they seem to have failed in countries that tried them. Is that so and does that mean that wealth taxes should be abandoned as a policy tool?
The number of OECD countries levying wealth taxes, defined as annual taxes on individuals’ net wealth stock above a certain threshold, has dropped from 12 in 1990 to only three in 2020 – Norway, Spain and Switzerland (see Figure 1). An important factor explaining their decline has been the way in which they were designed and administered. Political factors, particularly shifts in ideas and narratives, have also significantly contributed to their decline.
On the other hand, negative economic effects, commonly used as arguments for their repeal, have found limited empirical support. This is in part because wealth taxes were easy to avoid and evade, but the belief that economic repercussions could be large also played a role.
Figure 1: Number of OECD countries levying annual wealth taxes over time
Source: OECD Net Wealth Tax Questionnaire
What have we learned from past experiences with wealth taxes?
Previous experiences with wealth taxes show that tax bases were often significantly narrowed by a variety of exemptions and reliefs – for example, for pension assets, business assets, primary residences and artwork (OECD, 2018). As a result, the revenues collected from these taxes were limited, generally accounting for less than 1% of total tax revenues, with the notable exception of Switzerland.
Tax reliefs and avoidance opportunities also help to explain why most countries saw stable or declining tax revenues from their wealth taxes at a time when household wealth was increasing. In addition, the provision of exemptions and reliefs made wealth taxes more difficult to administer and effectively reduced their progressivity and redistributive effects (OECD, 2018).
While tax design has varied across countries, wealth taxes have typically been levied on relatively low levels of wealth, which added difficulties. Because a wealth tax is levied irrespective of the returns generated by people’s assets, it tends to penalise the holders of low-return assets and favour the owners of high-return assets. This can be regressive, especially if a wealth tax applies to part of the middle class, as was the case in some OECD countries. Wealth taxes levied on moderate levels of wealth also increased the risks of taxing people with illiquid wealth and little income to pay the tax.
The functioning of wealth taxes has also been hindered by difficulties that are more inherent to annual wealth taxation, such as the need to value assets regularly. This can be particularly challenging for certain types of assets – for example, non-listed or closely held businesses, artwork and intellectual property (OECD, 2018).
Economically, the expectation was that wealth taxes would discourage savings. But empirical studies have generally found that effects on actual savings tended to be limited, pointing to stronger effects on wealth reporting (for example, Seim, 2017; Brülhart et al, 2019; Durán-Cabré et al, 2019; and Advani and Tarrant, 2020, for a detailed discussion). These limited effects on savings may partly be explained by the ease with which wealth taxes could be avoided or evaded.
Another fear was that wealth taxes would encourage people to leave the country. But evidence on this issue tends to be anecdotal and the very few studies that have found evidence of such migration effects focus on regional wealth taxes (Brülhart et al, 2019; Agrawal et al, 2020).
Despite limited available evidence, these economic arguments were widely used politically, as revealed by the political statements announcing their repeal. Wealth tax repeals were also part of a broader shift towards pro-market beliefs, narratives and policy choices among policy-makers (Ridell, 2010; Svallfors, 2016; Anderson and Hassel, 2015).
Other political factors contributed to the decline of wealth taxes, including special interest groups that pushed successfully for tax reliefs, which ended up limiting the revenues and fairness of wealth taxes, and ultimately strengthened the case for their repeal (Herlin-Giret, 2017; Waldenström, 2018).
While the trend has been to repeal wealth taxes, not all countries have followed the same path, with some still levying wealth taxes (Norway, Spain and Switzerland) and some abolishing them only recently (for example, France in 2018).
In Norway and Switzerland, one of the explanations why wealth taxes are still in place is that they partly replace other taxes. Norway does not have an inheritance tax; and Switzerland does not levy capital gains taxes, and most cantons have abolished inheritance and gift taxes on transfers to direct descendants.
On the other hand, differences in public perceptions may largely explain why France kept its wealth tax until very recently. The tax was widely viewed as a symbol of fairness and its repeal was highly unpopular.
Is this time different?
Today’s world looks quite different. Inequality has increased and has been further exacerbated by the Covid-19 crisis. Inequality has also become a more prominent political topic in the last decade.
At the same time, taxes on personal capital income and assets play a lesser role than a few decades ago. In that context, raising taxes on labour and consumption, as was done in the wake of the global financial crisis of 2008/09, might be politically difficult and, in many cases, not desirable from an equity perspective. Governments may look to personal capital taxation as an option.
Administratively, governments are much better equipped to tax personal capital income and assets than before, in particular thanks to the progress made on international tax transparency standards, which make it much harder for taxpayers to conceal their wealth offshore (OECD, 2020). Digitalisation is also increasing tax administrations’ access to and use of data, which could further strengthen their ability to tax personal capital income and assets.
Countries may also learn from past experiences to design improved wealth taxes. In the United States, for example, some candidates in the 2020 Democratic primaries proposed wealth taxes with much higher tax exemption thresholds, which would minimise some of the issues encountered with previous wealth taxes. The US system, based on citizenship rather than residence, would also partly mitigate risks of tax-induced migration. Nevertheless, some of the difficulties associated with levying a wealth tax on an annual basis, such as regularly valuing hard-to-value assets, would be likely to remain.
Overall, the situation has changed in a number of ways and personal capital taxation will have to play a stronger role in many countries. Given the lack of empirical evidence on the economic effects of a broad-based wealth tax and some of the practical challenges involved in levying wealth taxes, there might be merit in making a priority of reforms that strengthen the design of existing taxes on personal capital income and gifts and inheritances. There is still a lot of room to reform these taxes in ways that would raise additional revenues and narrow wealth gaps (OECD, 2018; OECD, forthcoming).
But where strengthening personal capital income and wealth transfer taxation is not feasible or insufficient to narrow wealth gaps, there may be more justification for a wealth tax, possibly even as a temporary measure. In that case, a wealth tax would have to be designed and implemented in ways that avoid the pitfalls of previous attempts.
Where can I find out more?
- Why did other wealth taxes fail and is this time different? Sarah Perret’s evidence paper for the Wealth Tax Commission
- The Wealth Tax Commission website
- Behavioural responses to a wealth tax: Wealth Tax Commission evidence paper by Arun Advani and Hannah Tarrant
- Inheritance taxation in OECD countries: Forthcoming OECD report
- The role and design of net wealth taxes: Report in the OECD Tax Policy Studies series