A news article caught my eye recently. It was describing the results of recent tax increases in Norway, and the responses to those tax increases which apparently caught the policymakers off guard.
This isn’t the first time I’ve made reference to Adam Smith’s famous analogy about social planners and chess, nor will it be the last. But the relevant part of that analogy for this story is when Smith describes how the planner often “does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” What the policymakers in Norway apparently failed to consider is the way the rich might respond to a tax policy of “soak the rich.” It turns out that more often than not, the rich don’t particularly like being soaked, and when you make it more expensive to live or do business in a particular place, fewer people will want to live or do business there.
According to the article, in response to tax increases aimed at “super-rich Norwegians” (apparently defined as multimillionaires or billionaires), these taxpayers are just packing up and leaving Norway, and apparently many “have moved to Switzerland, where taxes are much lower.” The number of wealthy citizens who departed Norway within a few months of this tax increase was “more than the total number of super-rich people who left the country during the previous 13 years” combined, and “even more super-rich individuals are expected to leave this year,” which will end up “costing the government tens of millions [in] lost tax receipts.”
Among those who have departed is Kjell Inge Røkke (I hope I’m pronouncing that right!), who in the previous year “was the country’s highest taxed individual.” Not only will the Norwegian government not collect any additional revenue from him due to this tax increase, it will now lose all of the tax revenue he had previously been paying, which will have an impact of “about NOK 175m in lost tax revenue a year.” It was also estimated that “he has paid about NOK 1.5bn in tax since 2008.” Going forward, however, this particular goose will be laying his golden eggs in Lugano.
So, how big was this tax increase, to have provoked such a large and swift response? According to the article, the policy change consisted of “a relatively small increase in tax aimed at the country’s super-rich, who face wealth taxes at both the local and state level. That includes a municipal tax of 0.7% on assets in excess of NOK 1.7m for individuals, or NOK 3.4m for couples. There is also a state wealth tax rate of 0.3% on assets above NOK 1.7m. In November, the government raised the state rate to 0.4% for assets above NOK 20m for individuals, and NOK 40m couples, taking the maximum wealth tax rate to 1.1%.” I may have been a bit facetious with my “soak the rich” comment before—the total tax increase is quite small in percentage terms, and certainly smaller than the kinds of wealth taxes proposed by Elizabeth Warren.
The Laffer Curve is worth reviewing here. The basic phenomenon of the Laffer Curve is uncontroversial among economists—the controversy about the Laffer Curve is not whether it is real, but where it peaks. But the question of where the Laffer Curve peaks is itself an oversimplification. The short-run Laffer Curve will look different from the long-run Laffer Curve. The additional tax revenue collected in the long run from increased tax rates will be smaller than what is gathered in the short run, because it takes time for people to adjust their behavior in ways to offset the increased taxes. But technology is making the short run very short indeed. Advances in technology and the rise of remote work are making it easier and easier for people to relocate to new environments with less burdensome taxes and regulations. As Røkke says, “For those close to the company and to me, I am just a click away.”
READER COMMENTS
Jack
Apr 18 2023 at 6:43pm
The tax rate is small, but it is on assets not income, which makes it enormous, even if smaller than the Warren proposal.
Pierre Lemieux
Apr 18 2023 at 7:52pm
Jack: I had the exact same thought. A tax of 0.3% of capital is equivalent to a 3% tax on income if the return on capital is 10%. This is why that Brennan and Buchanan in The Power to Tax are so suspicious of taxes on wealth.
Knut P. Heen
Apr 20 2023 at 11:18am
I live in Norway and the people here simply don’t understand what the problem is. The wealth tax has been around for a while. The recent problem is not so much related to the tax rate itself, but the large changes in how the wealth is calculated (the loopholes are gone).
First, 1 percent of your wealth implies that you have to pay it even though you lost money last year. This implies that you sometimes have to take on debt to pay your taxes because you are losing money.
Second, wealth includes your stock portfolio at market value. Imagine you found a corporation with no current earnings, but with great prospects for the future. You do an IPO and suddenly your wealth is substantial. How do you pay the tax?
Third, the wealth tax is essentially the same as expropriation of your wealth and lending it back to you at an interest equal to the tax rate. In this case 1.1 percent.
Fourth, it is not targeted at the super-rich. 1.7 million NOK is about $150,000.
It is mainly the debt-like nature of the wealth tax that have caused problems for business owners and led them move the Switzerland. Most other taxes are equity-like in the sense that you pay more when you do well (corporation income tax, dividend tax, etc.). Imagine you earn 8 percent on your portfolio, a 1 percent wealth tax is similar to a 12.5 percent capital gains tax. The problem is that you have to pay 1 percent wealth tax even if your portfolio earned -8 percent.
MarkW
Apr 19 2023 at 8:36am
It also looks like perhaps some people may have been getting out while the getting was good — fleeing ahead of Norway tightening its exit tax:
https://www.worldservicesgroup.com/publications.asp?action=article&artid=23715
Richard W Fulmer
Apr 19 2023 at 4:05pm
Countries like Cuba, North Korea, and the USSR put up physical walls to keep people from fleeing the fleecing. Those who, like Janet Yellen, promote a global minimum tax rate are trying to create virtual walls that have the same effect.
David Seltzer
Apr 19 2023 at 5:18pm
Richard, good point! Still, it’s about incentives. Will corporations, not just here but in other self-interested countries, move from tax avoidance to tax evasion? Avoidance being legal and evasion otherwise.
David Seltzer
Apr 19 2023 at 4:53pm
It’s still about incentives. Does any individual want to pay more when there is a less costly alternative. It seems the deep thinkers in those bureaucracies have missed the point.
Mactoul
Apr 19 2023 at 10:17pm
America taxes its citizens on the income they earned aboard, even if the citizens live aboard.
Norway should do the same.
john hare
Apr 20 2023 at 4:16am
And how many former Americans switched nationalities for that reason? Expats.
MarkW
Apr 20 2023 at 7:00am
A growing number all the time (FATCHA reporting is also a problem that can be resolved by renouncing). But high worth U.S. citizens also face an exit tax when trying to get out for good. When it comes to these kinds of issues, the U.S. is more like an authoritarian nation than a free one.
GuyNorge
Apr 20 2023 at 1:16pm
If you tax income AND assets, you discourage, and in long run, prevent the transfer of family wealth by reverting it to the govt so the govt controls everything. This is nothing but classic socialism which leads to communism/atheism. Not necessarily in that order.
A faster way to accomplish the same thing is destabilizing the world economy thru monetary policy resulting in worldwide digital currency, famines and pestilences. We are seeing that formula now as well. Pick your poison.
I say nei to all these forms of oppression.
Herald of capitalism
Apr 20 2023 at 3:53pm
Loopholes are almost gone and the taxes on dividends has increased to 37%. So in order to pay the wealth tax, you first have to pay 37% tax on dividends. This simply puts Norwegian ownership at a huge disadvantage compared to foreign ownership. As a Norwegian, I find this to be a great shame. Until we elect a new government that champions free enterprise, capitalism and smaller government, private capital will continue to leave the country.
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