Indebted euro-zone countries are reviving wealth taxes. But should they?

October 9, 2012
Obsession
Euro Crunch
October 9, 2012

Nearly 2,400 millionaires in the US, it emerged last week, collected unemployment benefits in 2009. The news adds fuel to the debate about taxing the rich, which has intensified as Europe’s sovereign debt crisis worsens. France’s government has raised the rates of its wealth tax, leftist politicians in Ireland and Germany are pushing to introduce them, German citizens recently marched to demand one, and Britain’s Liberal Democrats have called for a “mansion tax” on expensive houses as well as a wealth tax—a demand now rebuffed by their coalition partners, the Conservatives.

Until recently, wealth taxes had largely fallen out of favor. They’re typically dismissed for being more about votes than about money. Most people love them because they’re not affected, and yet the revenue raised represents a tiny percentage of GDP. And that’s before calculating the cost of collections, capital flight from rich people leaving for lower-tax climates, and the dampening effect on investments.

Defending them, government leaders say wealth disparity is far greater than income disparity, and so taxes on assets versus income make sense. And indeed some measures are temporary, like the one proposed by the Lib Dem leader Nick Clegg. He says everyone should pay their fair share in a crisis, and the emergency measures will avoid a breakdown in social cohesion.

The problem is that even temporary solutions sometimes become permanent. And here’s how wealth taxes typically play out. Rich people seek citizenship elsewhere, like with Bernard Arnault, Europe’s richest man (Forbes), who has decided to turn Belgian in response to France’s new 75% top tax rate (admittedly an income tax, not a wealth tax). Often wealth taxes contradict other economic goals, such as increasing savings through pensions (though these are sometimes exempt) or encouraging businesses to expand.

Critics also say wealth taxes only encourage rich people to send valuable art and antiques abroad and put money into off-shore accounts. In 2007, Sweden scrapped a 1.5% tax on personal wealth over $200,000, saying it would make no difference to the budget. The tax annually raised SKr 4.5 billion ($680 million) from 2.5% of taxpayers, but was held responsible for capital flight of up to SKr 1,500 billion.

Then there’s the problem of calculating assets. Richard Murphy, an economist and accountant in the UK, says that wealth is often in property, pensions, and collectibles that can be tricky to value. In Britain the problem could be especially challenging as net worth is not disclosed in UK tax returns, just income.

There have been more radical proposals too. Greg Philo, who runs a media lab at Glasgow University, has been peddling his wealth tax solution for the past few years. He says if the wealthiest 10% in Britain paid a one-off 20% tax on the £4 million ($6.5 million) that, on average, he says they have, much of the UK’s debt would disappear. To make the tax less painful, he suggests settling upon a person’s death.

Philo’s proposal has received little serious attention, and with good reason. It’s thin on details; for example, there are no projections of what impact taking such a big bite out of rich people’s assets would have on the economy. It makes long-term planning hard (what if you’ve lost your fortune by the time you die and the tax is due?) It’s far from clear how the government would be able to make its debt vanish based on promises to pay tax that might only be fulfilled decades hence. Moreover, giving the government this easy escape hatch might only encourage it to mismanage the economy further.

Still, even Britain’s Conservative prime minister, David Cameron, says that “the rich will have to make a contribution to closing the budget deficit.” He promises new proposals by the time of the next election. It remains to be seen whether he can come up with something that satisfies popular demand for soaking the rich with a sensible proposal that brings in more than token revenues.

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