Hypocritically, the rich are seen as both the root of all of America’s problems, as well as a panacea. It is true that there is significant wealth inequality in the United States, but it seems that the most vocalized response to this is to blame the successful, instead of looking inwards to see what each individual can do for themselves first, or perhaps learn from those who have “made it.” Both liberal and conservative think tanks (Brookings Institute and the Heritage Foundation) agree that the three major indicators of future individual financial stability and overall well-being are ultimately determined by an individual’s choices: finish high school, get a full-time job, and wait until age 21 to get married and have children.
Still, the idea of a wealth or corporation tax is increasingly supported, as the most direct policy initiative to manifest the externalization of blame. I won’t spend this article delving into the cultural erosion, the tolerance of the abdication of personal responsibility, that a wealth tax’s popularity seems indicative of. Instead, I will present direct evidence to logically prove why wealth taxes will most likely fail, from a purely economic standpoint.
As usual, Western Europe is a decent place to look where America can evaluate the success (or lack thereof) of “progressive” policies. Of the 12 European countries that had wealth taxes in 1990, only 3 have not repealed it, and Belgium recently introduced a limited version which has yet to be comprehensively evaluated. Across the board, there was an exodus of wealthy individuals from the country, at the country’s expense. In Sweden, one of the most heavily taxed populations in the world (the top tax bracket is taxed 63%, and taxes are levied from both the state/canton and city level and includes almost all assets, from securities to jewelry) the tax caused approximately 1.5 trillion krona of capital flight (which is a historical precursor to economic depression which incurs reduced purchasing power for remaining civilians and unstable prices) while it was imposed. This raised concern from central, moderate, and liberal parties and representatives about potentially losing Sweden’s competitiveness in the global economy. It’s also been blamed for Sweden’s lagging in entrepreneurship compared to the rest of Europe. In France, an estimated 42,000 millionaires left the country between 2010 and 2012 when the tax was imposed, taking about $175 billion worth of assets with them. In addition, 400,000 jobs were lost, and unemployment increased by 2% while the wealth tax was imposed. Without dramatic expansion of government oversight and management of private wealth, wealth taxes in Europe failed dramatically to raise revenue and instead drained participating countries of economic strength.
Here’s why America wouldn’t be an exception to this pattern of wealth taxes bringing economic ruin.
To clarify, a wealth tax differs from current US taxes, in what is being taxed: in America, individuals are mainly taxed for their income earned from their jobs and investments. A wealth tax would be annually charged based on an individual's assets, which includes their stocks, home, cars, and art- essentially, everything someone owns- in addition to already existing income taxes. Obviously, this is attractive to proponents of wealth-distribution because it takes from a much larger range of money-making or valuable things that the rich possess.
Does it sound easy or even feasible for a government to track and tax every single possession of the rich, the most well-versed in financial policy? Just from a logistical standpoint, such a tax would be difficult to enforce since most assets are illiquid, so they wouldn’t be able to have their value quantified. The majority of net worth held by billionaires that politicians point towards to demonstrate exorbitant wealth are tied in stocks and are not simply cash in a pile somewhere. In Europe, the biggest problem in administering the wealth tax was valuing assets, and according to Wojciech Kopczuk at Columbia University, such problems “are as daunting in the United States as in Europe.” For example, 10 years ago IRS researchers compared estate tax returns with Forbes’ published calculations, and found discrepancies by a factor of two. This is illustrated by estate taxes in America, which are calculated only once during or after a lifetime under extremely specific policies, but are still notoriously difficult and expensive. Wealth taxes would require this process, for every asset, for every individual, every year.
Any extra revenue is often offset by administrative costs because of how difficult it is to put a number for the value of what the rich own. Although some may argue that the majority of the wealth of the top .001% is in listed securities with clear, market-based value, any investor knows that these prices can vary greatly. Assets like racehorses, antiques, and houses can take years to evaluate as auditors and tax authorities disagree. Case in point: Austria cited administrative costs in 1994, the year it abolished its wealth tax.
In addition to a disparaging lack of feasibility, wealth taxes would simply drive away the wealth to be taxed, reducing overall participation in, and health of, the economy. Looking at Europe again, their significant wealth taxes, levied more along the top 5% instead of the top 1% as the chant often goes in America, did not raise much money: as little as 0.2% of the GDP per year. The tax reeled in about $600 million a year in Sweden, but ultimately cost the country’s economy about $200 billion in capital flight. In France, Éric Pichet, a professor at the Kedge business school in France, estimates that the wealth tax had raised 3.6 billion euros a year, and robbed the national economy (the value of the assets and transactions of every civilian and corporation) of almost double the wealth tax’s revenue–€7 billion annually–in fraud and shrinking of the tax base. In the first 10 years of France’s tax, Pichet estimates that France lost about 200 billion euros of capital through a population exodus or a lack of investment, because entrepreneurs protected their wealth in accounts that were taxed less under other jurisdictions. In Germany, where assets weren’t taxed equally, they moved their investments out of stocks and bonds, which were taxed more, and funnelled more money into property, which was officially taxed much lower than the market rate. Predictably, investments moved back into securities after the tax was repealed. By turning wealth into a source of loss, wealth is inevitably protected by its proprietors by keeping it out of the country’s economy. Less value in the economy means lower wages and unemployment for all, reduced production of consumption (for the civilians) and capital goods (for businesses to invest in production with), investment in entrepreneurship and innovation, and could trigger widespread economic withdrawal.
Furthermore, the vast majority of the rich don’t store most of their wealth in the form of consumer goods like mansions or expensive cars that sit there and do nothing for anyone else, but on the contrary: in the form of business and capital assets that produce economic growth. Take Elon Musk, or Jeff Bezos, or any of the common targets of a wealth tax that people say “shouldn’t exist” for their monetary success. Musk is the largest investor in Tesla, owning about 22% of shares, and owns 54% of SpaceX. Bezos owns 11.2% of Amazon (including over 40 subsidiaries such as Audible, Twitch, Whole Foods which provide entertainment and goods to millions) as well as having invested millions into Uber, Airbnb, and the Washington Post. Mark Zuckerberg pledged 99% of the value of the stocks that he and his wife own to be donated over their lifetimes to other companies focused on modernizing education and science. These are just a few examples of how the rich dedicate much of their assets to ventures focused on collective advancement: producing and innovating technology and entertainment, distributing essential goods and journalism, improving education, and providing employment for hundreds of thousands of people. Weakening an entrepreneur’s ownership of their companies would detract both from the success of the company, and therefore the wealth made from it, which fuels these “paying it forward” ventures that everyone could benefit from. Wealth taxes would only disrupt the accumulation of capital, detracting from investments that would provide capital for innovators and producers—and for workers to work receive-- and be a deadweight loss for all Americans.
Here in America, California refuses to learn from Europe and is already recreating their mistakes. As the state with the highest income taxes in America, they still continue to propose and implement tax hikes: Two bills proposed over the summer of 2020, AB 2088 and AB 1253, would increase taxes for the top .15% of earners, as well as a .4% wealth tax on those with a net worth above $30 million- which would even apply to residents for 10 years after they leave the state, and would raise the taxes on higher-income earner from 13.3% to as much as 16.8% (respectively). Elon Musk has threatened to move Tesla’s headquarters out of California, while the clients of many high-level accounting and consulting companies are increasingly indicating an impetus to leave the state, as COVID19 has made them realize that it makes no sense to stay in such a highly taxed area when they could work remotely from anywhere. In response to 2012 tax hikes in California by 3% for high income households, the exodus of top-bracket California taxpayers, and behavioral changes by those who stayed, combined to eliminate 45.2%–nearly half–of the windfall tax revenues from the legislation. Expanding this policy to encompass the entire nation was be a devastating repeat of European failure, sending entrepreneurs and wealth overseas and leaving America both politically divided and economically weak.
Wealth taxes will fail America. It will fail the rich by undercutting their self-made success and driving them away from the US. It will fail all other classes by depressing their wages and prosperity and decreasing the available technology and innovation that the wealthier are providing through their assets, investments, and initiatives. Even without ethical considerations, the empirical evidence is clear against a wealth tax in this country from a practical standpoint.
*The author does not claim to represent all the opinions of all the members of the Postpartisan in this essay.