International Liberty

Class-warfare tax policy is always a bad idea.

• Economists generally don’t like class-warfare policies because it is foolish to impose high marginal tax rates on productive behaviors such as investment and entrepreneurship.
• Politicians should not like class-warfare policies because of the negative impact on jobs and wages for ordinary people as well as the potential negative impact on tax revenue.

But notice I qualified both statements. I wrote that economists “generally don’t like” class warfare because the profession includes leftist ideologues such as Piketty, Zucman, Krugman, and Stiglitz.

And I also wrote that politicians “should not like” class warfare because it is actually very common for elected officials to ignore bad economic effects if a policy gives them good political results.

This last phenomenon – politicians doing things they know are destructive – will be our topic today.

But we’re not going to look at politicians doing dumb things in the United States (though there are plenty of examples).

Instead, let’s cross the ocean and look at proposed wealth taxes in Denmark and the Netherlands.

We’ll start with the normally semi–sensible nation of Denmark. As reported by Moustafa Daly of Investment Migration Insider,

Danish Prime Minister Mette Frederiksen has called a snap election for March 24, placing a new wealth tax at the center of her campaign. The tax proposal targets Denmark’s wealthiest 1%, a group of fewer than 60,000 people who collectively control roughly a quarter of the country’s total net wealth, and aims to raise approximately 6 billion kroner (about $1 billion) per year. …Frederiksen’s announcement immediately fractured her own government. Lars Løkke Rasmussen, Denmark’s foreign minister and leader of the centrist Moderates, rejected the wealth tax outright. Troels Lund Poulsen, the Liberal Party’s candidate for prime minister, declared he would not join any government that implements it, calling the measure economically damaging. The cross-partisan coalition that has governed Denmark since 2022 is, in effect, over.

This sounds like bad news for the wealth tax…and good news for taxpayers and the Danish economy.

But perhaps not. The Prime Minister’s party may not need support from the Moderates or the Liberals (the Liberals are not leftists, but instead are closer to classical liberalism).

Current polling from Epinion and Megafon puts Frederiksen’s left-leaning bloc at 87 to 88 seats in Denmark’s 179-seat parliament, just short of the 90 required for a majority.

The article also explains that the wealth tax would have very negative effects, citing the disastrous impact that levy had in Norway.

In 2022, Norway’s Labour-led government raised its wealth tax rate by 55% in real terms, expecting to net an additional $146 million per year. Capital flight followed: 82 wealthy Norwegians with a combined net worth of approximately 46 billion kroner ($4.3 billion) left the country in 2022 and 2023, with more than 70 relocating to Switzerland. Independent estimates put the resulting revenue loss at roughly $594 million, four times the projected gain.

Politicians are evil, but that doesn’t mean they are stupid. As such, they often impose confiscatory Soviet-style exit taxes in hopes of making it too costly for successful people to leave.

As the article notes, there are not many details on what Danish politicians are planning.

Exit tax design will matter enormously. Norway’s 2022 reform made exit taxation indefinite and eliminated the previously available five-year deferral window, thereby accelerating departures as wealthy residents rushed to leave before the rules tightened. Denmark has not yet published the proposed mechanics of the exit tax. Until it does, market professionals cannot fully model the cost of staying versus leaving.

Now let’s shift from Denmark to the Netherlands.

Dutch politicians, also not learning from Norway, are considering their version of a wealth tax. Here are some excerpts from a story by Hans van Leeuwen, which was shared by Yahoo! Finance.

Dutch parliamentary votes seldom make international headlines, let alone spark an international firestorm on social media. Especially if the vote is about tax law. But last week, Dutch politicians voted to reform the part of their tax system… As a result of this vote, from 2028, the Dutch will pay an annual 36pc capital gains tax (CGT) on any increase in the value of their stock, bond or crypto investments, even if they have not sold the asset and realised the gain. Even if investors only make money on paper and are sitting tight, they will have to stump up hard cash for the tax collector. …By the end of this week, almost 50,000 people had signed an online petition demanding that the Dutch parliament’s lower house revisit its vote. …The pushback reflects a deep-seated aversion to hitting investors with CGT on unrealised gains, which flies in the face of how a capital gains tax normally works. In fact, it’s probably a misnomer to call this a capital gains tax. In effect, it’s actually a wealth tax.

A few nutty American politicians also have proposed to tax unrealized capital gains, so this is not an unknown idea.

But it is a terrible idea.

One reason the Dutch are considering the tax is because the courts rejected a different (but still bad) tax.

The tax already existed before this vote. But instead of taxing people on their personal unrealised gains, the authorities have been taking a shortcut. Each year, they just tax everyone as if they had made an identical gain. This year, the assumed rate of gain (or “fictive rate”, as the Dutch call it) is almost 7.8pc. Dutch taxpayers only really became restive about this during the Covid pandemic. Many investors were making huge losses at that time, but were still paying tax on fictive gains. A group of taxpayers challenged the tax in court, and won.

I’ll finish today’s column by citing an editorial from the Washington Post.

Capitalism is so intertwined with Dutch culture that residents of the Netherlands celebrate their king’s birthday by setting up vrijmarkten, “free markets,” in town squares to buy and sell household goods. Yet that country appears set to adopt one of the most aggressive capital tax regimes in the world. Unlike most other countries, including the U.S., which tax capital gains when they are realized (when the asset is sold), the Dutch bill would also tax unrealized gains each year. The bill…would force people to pay a tax rate 16 percentage points above the OECD average on income they didn’t really make. …And this tax would apply to everyone who owns stocks or bonds, not just the rich. Tax enthusiasts shout that billionaires should pay more. But the Netherlands only has 13 billionaires (around the same number as U.S. states Colorado and Arizona), and they can move their wealth elsewhere. …What a tragedy if the birthplace of the modern stock market moves to punish the vital form of wealth creation that it pioneered.

The editorial cites the miserable results of Norway’s exit tax.

Norway, which has a wealth tax on unrealized gains, has found that even an exit tax hasn’t stopped wealth from fleeing the country. More than a hundred of the 400 richest Norwegians either live abroad or have moved their wealth to relatives in other countries. Unlike Norway, the Netherlands is an E.U. member, making it easier for Dutch residents to move elsewhere in Europe.

I’m baffled that the Danes and the Dutch want to copy Norway. Is failure contagious?

But I don’t mean to pick on our European friends.

Some politicians and big-spending interest groups want to do the same thing in California.

And the mere possibility of this unfair levy is already causing damage.

P.S. You can read about international tax-motivated migration here and here.

P.P.S. And you read more about Norwegian economic policy here and here.

P.P.P.S. If you want to learn more about the economic harm of wealth taxes, click here, here, here, here, and here.

And one reason wealth taxes are so damaging is that they (like the death tax) are a pure form of double taxation. To learn more about double taxation, click here, here, here, here, and here.