Here's why Europe has mostly ditched wealth taxes over the last 25 years - even as Elizabeth Warren and Bernie Sanders seek them for the US
- Over the past year, progressives have thrust the idea of taxing wealth towards the center of the Democratic primary.
- They contend it's an effective way to rein in income inequality and drastically cut the fortunes of the rich.
- But wealth taxes in Europe have never been a significant driver of government revenue across the continent for several key reasons.
- For starters, they were difficult to administer and the revenue generated was low as a result of exemptions on taxable assets.
- In the US, critics argue its an impractical way to raise revenue at the possible expense of hurting economic growth, and others have raised questions whether it is constitutional.
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Over the past year, progressives have thrust the idea of taxing wealth towards the center of the Democratic primary. They argue it's an effective way to drastically slash the fortunes of the rich and cut their economic power.
Both Sens. Elizabeth Warren and Bernie Sanders are leading the charge with proposals to tax the fortunes of the wealthiest Americans to help pay for their sweeping agendas.
The rising level of inequality is sparking a fierce debate among Democrats over how to narrow it and restore a level of security for average families. And the wealth tax that Europe piloted in the past has animated liberal voters in the primary.
Currently, the US mostly taxes individuals on the income earned from their jobs and investments. Where the wealth tax differs is the annual levies the government could collect on assets like stocks, paintings, yachts, artworks, and vacation homes - essentially, everything a person owns.
Usually, progressives cast Europe as a model for the cradle-to-grave social benefits that nations like Norway provide because of steeper tax rates on richer citizens. But most have kept the continent at arm's length when it comes to the wealth tax.
Twelve European countries had a wealth tax in 1990, according to the Organization for Economic Cooperation and Development. But now the number stands at four: Spain, Switzerland, Norway, and Belgium, which just introduced a limited wealth tax of its own.
It's never been a significant driver of government revenue across the continent for several key reasons.
European wealth taxes were hard to administer and easy to avoid
France was the latest country to scrap its three-decades old wealth tax back in 2017, the product of French President Emmanuel Macron's effort to spike investment into the economy and stem the exodus of wealthy people leaving the country, Reuters reported.
Most economists, though, agree that Europe's wealth taxes were poorly designed and implemented. French economist Eric Pichet estimated the outward flow of wealth cost the French government twice as much revenue as the total ultimately yielded by the tax.
Emmanuel Saez, a left-leaning economist at the University of California, Berkeley - who has analyzed the Warren and Sanders wealth tax proposals - said the wealth taxes failed because governments created scores of exemptions that undercut its ability to draw revenue.
"The wealth taxes in Europe have failed by and large," Saez told Business Insider. "Either they didn't raise that much revenue because of big exemptions for asset classes or they've been repealed."
Daniel Bunn, the director of Global Projects at the nonpartisan Tax Foundation, previously told Business Insider of the wealth taxes that "they can be really difficult to administer and ensure even a moderate compliance rate."
In Austria, "high administrative costs" and "the economic burden on Austrian enterprises" led the country to abolish their wealth tax in 1994, noted a wealth tax study from the Leibniz Institute for Economic Research at the University of Munich.
Finland, Sweden, and the Netherlands are among the nations that eliminated theirs in subsequent years for similar reasons. A constitutional court in Germany struck down the tax for its unequal treatment of different assets.
Saez pointed out that the tax in Europe suffered from tax competition, meaning governments set rates low in a bid to draw investment from abroad - and undercutting each other's ability to generate revenue in the process. Offshore havens also enabled individuals to reduce what they owed.
He offered the example of a wealthy French citizen moving to London for a year - and no longer being legally mandated to pay levies to the French government when its program was in effect.
Most of the continent's wealth taxes were tied to residence, not citizenship like in the United States, making it easier to escape the tax by simply switching your home address to a neighboring country. That's not difficult in the European Union, which prides itself in the freedom of movement and relatively open borders within its 28 member states.
Famously, actor Gérard Depardieu moved to the Belgian town of Nechin straddling the French border in 2012 to avoid France's wealth tax, the Telegraph reported at the time. Over time, the tiny, tranquil village of just over 2,000 people further evolved into a magnet for scores of wealthy French citizens seeking to dodge Paris's high-tax regime.
Also, the taxes in Europe often kicked in at much lower amassed wealth than what Sanders and Warren are currently proposing, and it impacted a much larger share of citizens.
The levy doesn't generate much tax money in the nations where it's still locked in. Spain now taxes household fortunes starting at 0.2% when they surpass 700,000 euros, or over $774,000. The net worth thresholds are also much lower in Norway and Switzerland compared to the ones set by Madrid.
In Spain, data from the OECD shows that a net wealth tax on individuals made up 0.55% of all its tax revenues in 2017. By comparison, the rate in Norway stood at 1.1% and just above 3% in Switzerland that year.
How the Warren and Sanders wealth tax plans learn from Europe
The Sanders and Warren tax proposals have drawn fierce blowback from wealthy individuals, Wall Street financiers, and some economists. Critics argue its an impractical way to raise revenue at the possible expense of hurting economic growth, and others have raised questions whether it is constitutional.
"For progressives to invest their energy in a proposal that the Supreme Court has better than a 50% chance of declaring unconstitutional, that has very little chance of passing through the Congress, whose revenue potential is extraordinarily in doubt... it seems to me to potentially sacrifice an immense opportunity," said former Treasury secretary Larry Summers at a Peterson Institute panel on inequality last month in Washington.
Tax experts also say it could also prove difficult to appraise a financial value onto what a person owns.
"It sounds simple: Just pay X percent on your assets every year. But it's not simple to determine the value of those assets," Eugene Pollingue Jr., a Florida-based tax expert, told The New York Times.
Saez and Gabriel Zucman - a left-leaning economist who partnered with Saez - said in a Washington Post op-ed earlier this year they helped design Warren's wealth taxes with Europe's failures in mind.
They cited "a large exit tax" of 40% on net worth that's a feature of both the Sanders and Warren tax plans, triggered if a wealthy individual attempts to renounce their citizenship to evade the Internal Revenue Service.
They also pointed out there were "myriad exemptions" on taxable assets that European countries allowed in their programs that both progressive candidates tossed out.
The thresholds when the tax would take effect is also much higher in their proposals. In Warren's plan, all net worth under $50 million is exempted, compared to $32 million for the Sanders plan.
Whether it raises the estimated revenue is another question. The Sanders plan would rake in $4 trillion in government tax dollars over a decade, according to estimates, and Warren's version would draw $500 billion less in the same period. But rich citizens will likely try to shelter their assets and evade the tax.
"I think a wealth tax would certainly raise a significant amount of money," senior fellow at the Urban Institute Janet Holtzblatt told FiveThirtyEight. "But will it raise enough money to pay for everything that's been suggested? That's a much harder question to answer."
Saez pushed back against criticism of the wealth tax by framing its success as a matter of societal choice and political will.
"Societies through their government decide whether taxes are going to be well-enforced, so its not a technological constraint," Saez told Business Insider. "It's really whether we are serious about taxing the rich with little tax avoidance and evasion, we can do it."