Why Wealth Taxes Always Fail

Around the world, wealth taxes have become a major topic of political debate. Proposals for a supranational wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. in the European Union, a billionaire taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. in California, and the floating of similar measures in New York, France, and Denmark all reflect a growing conviction that extraordinary concentrations of wealth warrant extraordinary responses.

Yet taxing wealth is hardly a new idea. Such policies have been well tested, and their track record has been disappointing. Among other things, the revenue typically falls short of projections; behavioral responses inevitably erode the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.; economic costs usually extend beyond the wealthy; and persistent legal challenges add another layer of uncertainty. Wealth inequality may very well be a problem worth addressing, but wealth taxes are not the solution.

Since the 1960s, at least 13 OECD countries have implemented net wealth taxes, and only a handful have kept them in place. Most were abandoned not because of ideological shifts, but because policymakers recognized the consequences. Governments reversed course after discovering that they had unwittingly encouraged capital flight, depressed investment and long-term economic growth, and created high administrative and compliance costs, all while raising relatively little revenue. Today, the few OECD countries that still impose broad net wealth taxes—including Spain, Norway, and Switzerland—collect only modest revenues from them, typically ranging from about 0.2% to just over 1% of GDP.