By Jared Walczak, Special for CalMatters<\/p>\n
This commentary was originally published by CalMatters<\/a>. Sign up<\/a> for their newsletters.<\/p>\n Guest Commentary written by<\/p>\n The proposed California wealth tax<\/a> has no antecedents in the United States. European countries, by contrast, have spent decades experimenting with wealth taxes and their experience, which has been profoundly negative, can help California avoid repeating their mistakes.<\/p>\n Over the past six decades, 14 European countries have imposed a broad tax on personal wealth. Most repealed them, with officials citing capital flight, disappointing revenue, high administrative costs and revenue losses from other existing taxes.\u00a0<\/p>\n Today only three European countries<\/a> still impose broad taxes on net assets: Norway, Spain and Switzerland.<\/p>\n Whereas the California ballot initiative applies only to billionaires, European wealth taxes tend to apply far more broadly. The three currently in effect in Europe kick in when net wealth reaches $200,000 (in US dollars).<\/p>\n These European wealth taxes are riddled with exemptions, many of which benefit high-net-worth individuals. Notably, they have commonly exempted business ownership interests. This reduces the salience of such taxes for highly mobile, high-net-worth individuals, but also reduces the taxes\u2019 potential yield.\u00a0<\/p>\n A combination of capital flight and wide-ranging exemptions has led to disappointing revenue performance, with these national wealth taxes generating, on average, 0.2% of gross domestic product<\/a> \u2014 one-fiftieth of what the United States raises in federal income taxes.<\/p>\n California\u2019s proposed 5%, one-time wealth tax<\/a> would be much narrower since it only applies to about 200 of the state\u2019s wealthiest household<\/a>s, but its application to those taxpayers\u2019 net worth would be significantly broader. Therefore some effects \u2014 particularly capital flight by the highest-net-worth households \u2014 would be magnified. However other impacts, on small business formation, for instance, are likely to be substantially attenuated.<\/p>\n With that in mind, here are four lessons from the European experience.<\/p>\n First, wealth taxes trigger capital flight. French, Swedish and Irish figures cited outmigration \u2014 and a resulting outflow of jobs, investment and entrepreneurial activity \u2014 as a rationale for repeal.<\/p>\n In Switzerland, a study found<\/a> that a 0.1 percentage point increase in a canton\u2019s wealth tax reduces taxable wealth by 3.5%. In Norway, an increase in the wealth tax prompted more ultra-wealthy households to depart the country in 2022<\/a> than in the prior 13 years combined.<\/p>\n Second, wealth taxes undercut economic activity even among those who remain. Wealth taxes affect entrepreneurial decision-making, reduce returns on investment, introduce economic distortions and undermine job creation and business expansion. A recent study<\/a> suggests that losses from behavioral responses are almost 2.5 times those from departing wealth.\u00a0<\/p>\n Third, wealth taxes deprive governments of revenue from other taxes. Their collections are substantially offset by declines in revenue from income, consumption, property and other taxes driven by wealth-tax-induced capital flight and reduced economic growth.<\/p>\n A study<\/a> by scholars largely sympathetic to wealth taxation estimated that for every dollar generated by Scandinavian wealth taxes, 76 cents is lost under other taxes: 22 cents directly from migration responses and 54 cents from behavioral responses among those who remain.\u00a0<\/p>\n Other estimates are far worse. In France an analysis<\/a> of the now-repealed wealth tax estimated that the government lost twice as much in reductions to other taxes as it generated from the wealth tax.<\/p>\n And fourth, compliance and administrative costs can be extraordinarily high. A study<\/a> of the now-repealed Irish wealth tax estimated taxpayers\u2019 average compliance costs at 18.5% of wealth tax revenue, while government administrative costs were 14% of revenue.\u00a0<\/p>\n In Germany one estimate put government administrative costs under the wealth tax, repealed in 1996, at 12.3%<\/a>. Some countries achieved low administrative costs<\/a>, but they generally exempted businesses and other forms of wealth that are highly valuable and difficult to assess.<\/p>\n California’s tax may be more aggressive<\/p>\n Wealth tax proponents acknowledge some of the shortcomings of European wealth taxes. Gabriel Zucman<\/a> \u2014 a professor at the Paris School of Economics and UC Berkeley and one of the global architects of the wealth tax effort \u2014 has bemoaned<\/a> the exemptions of European wealth taxes and acknowledges that outmigration and capital flight could be higher under the more aggressive wealth tax regimes he recommends (reflected in the California initiative\u2019s design).\u00a0<\/p>\n This would be particularly true of a state-level wealth tax, since expatriating from one\u2019s country is far more difficult than moving across state lines. He recommends imposing heavy \u201cexit taxes\u201d \u2014 which would likely violate the U.S. Constitution \u2014 to prevent an exodus under more aggressive wealth taxes.<\/p>\n That, however, may be the only lesson proponents have drawn from the European experience.\u00a0<\/p>\n A California wealth tax, at a rate higher than anything in Europe and applied to a far greater share of the wealth of highly mobile billionaires, doubles down on the economic harms that led most European countries to abandon them.<\/p>\n This article was originally published on CalMatters<\/a> and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives<\/a> license.<\/p>\n","protected":false},"excerpt":{"rendered":"By Jared Walczak, Special for CalMatters This commentary was originally published by CalMatters. 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