The case against a wealth-tax
WASHINGTON, D.C. — Thirty years ago, there were 12 European countries that had a net wealth tax, a type of levy on personal net assets, which can include anything from investments to cars, jewelry, and collectibles. Today, only three of these countries continue to impose such a tax, which has often proven to be an ineffective way to generate revenue and redistribute wealth.
While European countries have been doing away with this policy, a number of progressive Democrats in the US have begun floating this as a solution to narrowing the gap between the rich and the poor.
In France, the solidarity tax on wealth, or ISF, was created in 1982 under socialist President François Mitterrand, targeting individuals with fortunes over 3 million francs — the equivalent of some $517,000 today. The law was abolished and reinstated over the years, and the threshold was changed as well. Last year, under President Emmanuel Macron, France became the latest European country to shed a comprehensive wealth tax in an effort to halt the flight of wealthy families and attract others who may be seeking a new home in light of Britain’s impending departure from the European Union.
Macron followed through on his campaign promise to scrap the ISF, and replaced it with a tax on real estate over 800,000 euros. Bank accounts, investments, automobiles, yachts, even antique gun collections are now exempt. For many French citizens who are asset-rich but cash poor, the wealth tax had become increasingly onerous as they were forced to come up with hundreds of thousands, even millions of euros in liquid currency to pay the tax man each year.
Macron has sought to ease the tax burden in France and usher in reforms. From an optics point of view, it didn’t help that Macron scrapped the wealth tax and proposed tax cuts for businesses while planning a tax hike on a gasoline in an effort to address climate change. The move fueled Macron’s image as a “president of the rich,” and contributed to the anger of yellow vest protestors that has spilled into the streets, erupted at times in violence, and shaken the foundations of his government.
In the US, Democrats like Elizabeth Warren have proposed their own visions of a possible wealth tax. Warren’s proposal would levy a 2% tax on a family’s net worth in excess of $50 million, with an additional 1% tax on net worth that exceeds $1 billion.
“My #UltraMillionaireTax would make the richest tippy-top 0.1% of Americans start doing their part for the country that helped make them rich,” Warren claimed in a tweet after announcing her candidacy.
But wealth taxes are not always effective. They may impact business creation and risk taking. The administrative costs of enforcing a wealth tax, and the risks of driving wealthy taxpayers elsewhere also pose serious challenges, according to a 2018 Organisation for Economic Cooperation and Development report. More importantly, the report states, “Wealth taxes often failed to meet their redistributive goals as a result of their narrow tax bases as well as tax avoidance and evasion.”
France is a classic case study of these problems. About 42,000 millionaires left France between 2000 and 2014, according to the financial paper Les Echos. Many of them decamped to other countries like Belgium or Portugal, which boasts a flat tax rate of just 28% on income from interest and investments for expats — and no wealth tax. Eugenio Carreira, a French accountant, pointed out to me that an estimated 15,000 French expatriates have taken up residence in Portugal, many of them eager to flee the French tax system.
Pierre-François Taittinger, of the famed champagne house, said the French tax system forced his family to sell a controlling stake of the Taittinger brand to the American investment firm Starwood Capital in 2005. “Half of my family left France because of taxes,” Taittinger told the Washington Post in 2006. “They now live in England, Belgium and other countries where they were warmly welcomed — unlike here.” One French tax consultant, Eric Pinchet, estimated that the wealth tax earned the government some $2.6 billion a year, but cost it more than $125 billion in capital flight every year from 1998 to 2006.
The main reason Macron decided to do away with the wealth tax — in what could turn out to be a politically catastrophic decision– was to lure families like the Taittingers and their fortunes back to France. Doing so was also part of a wider attempt to make the country more attractive to British businesses, financial firms and their wealthy managers after Brexit, with the potential to create thousands of jobs for French workers.
Yellow vest protesters took to the streets again on Saturday and Macron has sought, with little success, to show them that tax cuts can lead the country down a path to more investments and jobs.
And even without the wealth tax, French citizens are still saddled with a slew of others. “We are champions of the tax,” smiled Carreira, who then proceeded to list a value-added-tax (VAT); taxes on all earnings, interest, and capital gains; and a fuel tax that leaves gas at the pump approaching $6 per gallon. There’s also an inheritance tax and certain habitation taxes, which Macron has endeavored to peel away.
This brings us back to one key warning from the OECD when it comes to levying a wealth tax — it’s not an efficient way to generate revenue or redistribute wealth in countries that already have robust income, inheritance and gift taxes. The US already imposes these, and an additional wealth tax would likely backfire.
“From both an efficiency and equity perspective, there are limited arguments for having a net wealth tax on top of broad-based personal capital income taxes and well-designed inheritance and gift taxes,” the OECD concludes.
How badly do American voters want to take from the wealthy and live with the consequences? I should point out that I, myself, am not even close to being subjected to any wealth tax. Still, I’ve seen a close-up of the negative consequences in France and other neighboring countries. Considering the pitfalls of the wealth tax in European countries, it seems that the US would be foolhardy to follow in their footsteps.
Commentary from journalist David A. Andelman