Wealth taxes raise little. Mobility does the rest.
Governments often turn to wealth taxes when they face budget pressures and clear signs of inequality. The idea is tempting because the tax targets a small, wealthy group that is easy to identify.
The challenge is that wealth is different from income. It does not always generate cash, it can be difficult to measure, and owners may move it if taxes give them a reason.
Denmark’s proposed tax highlights this problem.
The prime minister suggested a 0.5% annual tax on net assets exceeding 25 million kroner, or about $3.9 million, to reduce the wealth gap. Some left-leaning parties want an even higher tax.
It sounds straightforward, but implementing the tax is complicated.
Wealth taxes cover all net assets, such as shares, securities, and property, even if they do not generate cash. This means assets must be valued every year, which can lead to disagreements and sometimes force people to sell assets to pay the tax. The paperwork involved can become a burden.
Other countries’ experiences show why there is resistance. France, Germany, and Sweden dropped wealth taxes because of tax avoidance, capital flight, and low revenue. These taxes usually accounted for less than 1% of total tax revenue.
The real driver is not just ideology. Denmark already taxes its citizens heavily. A new 'top-top tax' raises the highest tax rate for top earners to just over 60%. There is also a 25% VAT on most goods and services. Adding a wealth tax would put even more pressure on a small group of wealthy people who could choose to move elsewhere. to relocate.
That is the constraint. The tax base is narrow and mobile. Denmark’s proposal would fall on roughly 20,000 taxpayers. If even a small number leave, the expected revenue can shrink quickly. Norway’s 2022 experience points to the same risk. When business owners leave, they do not just take personal wealth. They can take economic activity and future tax revenue. People often mention Switzerland as an exception, but it actually shows the limits of wealth taxes. Switzerland uses low rates, taxes a wide group of people, and lets its regions compete. This is very different from targeting only a small, wealthy group.
The overall trend is clear. Wealth taxes are popular in politics because they focus on people who do not have many supporters. But in practice, they are hard to manage because assets must be valued, owners can avoid the tax, and money can leave the country.
A better approach is to tax wealth when it is easier to measure. For example, capital gains can be taxed when they are realized, and inheritances can be taxed when wealth is passed on. Real estate and land can be taxed based on updated values, since these assets cannot be moved to another country.
People and organizations react to the rules they face. Politicians often choose taxes that seem to affect others. Asset owners may respond by moving, changing how they own things, or adjusting the timing of their actions. Tax officials are left to handle the difficult details.
Looking ahead, governments are unlikely to stop focusing on wealth, since wealth concentration and budget pressures will continue. The real question is whether they will tax wealth at points that are easier to manage, or keep trying a method that many developed countries have already tried and dropped.
A tax can be widely supported but still be a poor tool.