Wealth Taxes Fail

Adam N. Michel and Chris Edwards

Californians will vote on a 5 percent tax on billionaire wealth this November. In Congress, Sens. Elizabeth Warren (D‑MA) and Bernie Sanders (I‑VT) are pushing plans for an annual wealth tax. And abroad, Norway and Spain have expanded their wealth taxes, and some countries want to impose a global wealth tax.

Our new Cato study, “Failures of Wealth Taxation,” discusses why these efforts are misguided. The study describes how a dozen European countries have tried wealth taxes but then repealed them in failure. Wealth taxes raise little revenue, drive out investment and entrepreneurs, and become riddled with loopholes.

Here are a few highlights: 

Countries repealed wealth taxes. Austria, Denmark, Finland, France, Germany, Iceland, Luxembourg, the Netherlands, and Sweden repealed their wealth taxes as the economic damage and administrative costs were too high. Colombia, Norway, and Spain still have wealth taxes but face similar problems. 

Low wealth tax rates are not low. A wealth tax is based on the value of assets, not annual returns, thus a seemingly low 3 percent annual wealth tax on an asset earning 5 percent is equal to a 60 percent income tax.

California’s proposed tax could lose money. Proponents say the initiative will raise $100 billion, but after taxpayer responses, it may only raise $40 billion. Indeed, the state would likely lose money overall because the income tax base would shrink from departing billionaires. 

Workers pay a price. Counter to the views of wealth tax advocates, capital and labor are complements. Taxing wealth means taxing the business assets of high-end portfolios. Those assets support worker productivity and wage growth, so taxing wealth is ultimately an anti-worker policy. 

Wealth is good. Rather than being concentrated, wealth in America is dispersed across the economy in productive business assets. Among the top 0.1 percent of households, 73 percent of net wealth is equity in private or publicly traded companies, and almost three-quarters of American billionaires are self-made. All wealth benefits the economy, and policymakers should reduce the barriers to wealth creation for all families.

Tax consumption instead. America does not need new taxes but rather to fix the complex and unequal tax systems already imposed. Congress should shift the federal tax code toward a consumption base to reach every dollar the wealthy spend without penalizing the investments that benefit workers and the economy. 

Read the full study here.