The proposed California wealth tax would be the first in the U.S., but European countries have considerable experience with wealth taxes and have almost invariably repealed them as failed experiments. Proposition 40 is a far more aggressive tax than anything tried in Europe—an express goal of its drafters, who have bemoaned the relative laxity of European wealth taxes, most of which did not, among other things, apply to non-publicly traded businesses.
Fourteen European countries have tried wealth taxes, but only three still have broad-based wealth taxes on the books. Most countries ultimately rejected them—again, taxes far less aggressive than the one proposed in California—because they hurt the economy, drove outmigration, and were extremely difficult to administer.
For an analysis of legal and administrative challenges surrounding Proposition 40, click here to read my paper for the CalTax Foundation. What follows is a short fact sheet on the dismal performance of wealth taxes in Europe.
European Countries Have Largely Abandoned Wealth Taxes
Fourteen European countries have imposed wealth taxes: Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Spain, Sweden, and Switzerland, with a peak of twelve from 1993-1996.
Today, only three countries impose broad taxes on net wealth: Norway, Spain, and Switzerland.
Government officials have cited capital flight, economic harm, high compliance and administrative costs, and disappointing revenues as reasons for repeal.
European Wealth Taxes Drive Capital Flight and Outmigration
In Norway, where the wealth tax peaks at 1.1 percent and leaving the country triggers an exit tax of 37.8 percent of unrealized gains, restrictions on deferral regimes led to expanded outmigration, with more than 30 Norwegian billionaires and multimillionaires leaving in 2022, more than the number who left the country in the previous 13 years combined. According to reporting by a business magazine, 105 of Norway’s richest people live abroad or transferred wealth to relative who do.
A 2016 study of wealth taxes in Switzerland, where tax rates vary by canton, found that reported wealth holdings are highly responsive to the tax, with a 0.1 percentage point increase in wealth taxation lowering reported wealth by 3.5 percent.
A study of Scandinavian wealth taxes identified significant migration responses: a 1 percentage point increase in the top wealth tax rate decreased the number of wealthy taxpayers by about 2 percent.
When one Norwegian region cut its wealth tax rate by 1 percentage point, it experienced a 60 percent increase in average taxable wealth. Between 2015 and 2019, Bø’s percentage of net wealth associated with those who had moved there in the previous year was 1 percent or less each year. In 2022, the year the reform went into effect, this skyrocketed to 68 percent.
In France, the government estimated that about 10,000 people with 35 billion euros worth of assets left the country between 2000 and 2015 due to the now-repealed wealth tax. A French economist had much higher estimates, partly by capturing early responses to the tax’s imposition, concluding that from the wealth tax’s creation in 1988 through 2007, capital flight amounted to 200 billion euros.
When Sweden abolished its wealth tax, the government reported that 500 billion kronor (about $52 billion USD) was outside the country’s borders, with some of the wealthiest Swedes having left the country.
Migration across state borders is dramatically easier than country expatriation.
European Wealth Taxes Undercut Economic Growth and Reduce Revenue from Other Taxes
One study of Scandinavian countries estimated that taxpayer responses on the “intensive margin,” including changes in savings, investment, and avoidance, were nearly two and a half times as significant as outmigration. The authors also found that when an entrepreneur subject to the wealth tax leaves the country, this results in 33 percent less in-country employment in their business, a 22 percent decline in gross investments, and a 34 percent reduction in value-added.
The study of Scandinavian countries’ experience with wealth taxes also found that for each dollar of revenue raised by wealth taxes, $0.22 was lost from migration responses and another $0.54 was lost through behavioral and broader economic changes, totaling $0.76 lost in other taxes for every dollar raised in wealth tax revenue. The authors calculated that when entrepreneurs subject to wealth taxes left their countries, taxes from their business interests declined by 51 percent.
A French study estimated that the country’s former wealth tax reduced collections from other taxes by twice what the wealth tax yielded.
European wealth taxes often exempt business assets, in line with the recommendations of an OECD report, and sometimes exempted trusts as well. California’s proposed wealth tax, by contrast, is particularly aggressive in its taxation of business assets, which would generate outsized economic effects.
Wealth tax proponent Gabriel Zucman, writing with colleagues in an EU Tax Observatory report, wrote that “traditional [European] net wealth taxes had a narrow base, featuring business asset exemptions, valuation discounts and carveouts for unlisted shares or family firms,” and his recommendations for a more aggressive tax—with larger economic consequences—are embraced in the California initiative.
European Wealth Taxes Have High Compliance and Administrative Costs
A study of the now-repealed Irish wealth tax reported compliance costs of 18.5 percent of revenue and administrative costs of 14 percent of revenue. This suggests that nearly $0.27 of every dollar spent on wealth taxes was consumed by compliance and administration.
In Germany, the now-repealed wealth tax had estimated compliance costs of 12.3 percent.
Some countries achieved low administrative costs (but not necessarily low compliance costs), but this was generally accomplished by exempting business assets and other hard-to-value holdings that are key to the California initiative.
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