California can learn from European countries that tried wealth taxes

The proposed California wealth tax has no predecessors in the United States. European countries, by contrast, spent decades experimenting with wealth taxes, and their experience, which was profoundly negative, could help California avoid repeating their mistakes.

Over the past six decades, 14 European countries have imposed a broad personal wealth tax. Most have repealed them, with officials citing capital drain, disappointing revenue, high administrative costs and lost revenue from other existing taxes.

Today only three European countries still impose extensive taxes on net assets: Norway, Spain and Switzerland.

While California’s ballot initiative only applies to billionaires, European wealth taxes tend to apply much more broadly. The three currently in place in Europe come into effect when net worth reaches $200,000 (in US dollars).

These European wealth taxes are rife with exemptions, many of which benefit high-net-worth individuals. In particular, they usually released shares in the ownership of the business. This reduces the salience of such taxes for highly mobile high net worth individuals, but also reduces the potential gain from the taxes.

A combination of capital flight and sweeping exemptions led to disappointing revenue results, with these national wealth taxes generating, on average, 0.2% of gross domestic product — one-fiftieth of what the United States collects in federal income taxes.

California offers a 5% one-time wealth tax would be much narrower as it only applies to about 200 of the wealthiest households in the states, but its application to the net worth of these taxpayers would be considerably broader. Therefore, some effects – especially capital outflows from the highest net worth households – will be magnified. However, other impacts, for example on small business creation, are likely to be significantly attenuated.

With that in mind, here are four lessons from the European experience.

First, wealth taxes cause capital flight. French, Swedish and Irish figures cited emigration – and the resulting outflow of jobs, investment and entrepreneurial activity – as justification for the repeal.

in Switzerland, found a study that a 0.1 percentage point increase in cantonal wealth tax reduces taxable wealth by 3.5%. In Norway, an increase in the wealth tax caused more ultra-wealthy households to leave the country in 2022 than in the previous 13 years combined.

Second, wealth taxes undermine economic activity even among those who remain. Wealth taxes affect entrepreneurial decision-making, reduce investment returns, introduce economic distortions and undermine job creation and business expansion. A recent study suggests that losses from behavioral responses are almost 2.5 times greater than those from exiting wealth.

Third, wealth taxes deprive governments of revenue from other taxes. Their collections have been largely offset by declines in revenues from income, consumption, property and other taxes, driven by wealth tax-induced capital flight and reduced economic growth.

A study by scholars largely sympathetic to wealth taxation have calculated that for every dollar generated by Scandinavian wealth taxes, 76 cents are lost in other taxes: 22 cents directly from migration responses and 54 cents from behavioral responses among those who remain.

Other ratings are much worse. In France analysis of the already repealed wealth tax estimated that the government lost twice as much from cuts in other taxes as it generated from the wealth tax.

And fourth, compliance and administrative costs can be extremely high. Research of the now repealed Irish wealth tax estimated the average taxpayer compliance cost to be 18.5% of wealth tax revenue, while government administrative costs were 14% of revenue.

In Germany, one estimate puts government administrative costs below the wealth tax abolished in 1996. at 12.3%. Some countries have achieved low administrative costsbut they usually release businesses and other forms of wealth that are very valuable and difficult to value.

The California tax may be more aggressive

Proponents of the wealth tax recognize some of the shortcomings of European wealth taxes. Gabriel Zucman — a professor at the Paris School of Economics and the University of California, Berkeley, and one of the global architects of the wealth tax effort — he complained the exemption from European wealth taxes and acknowledges that emigration and capital flight could be higher under the more aggressive wealth tax regimes he recommends (reflected in the California Initiative plan).

This would be especially true for a state-level wealth tax, since expatriation is much more difficult than moving across state lines. He recommends imposing heavy “exit taxes”—which would likely violate the U.S. Constitution—to prevent exodus under more aggressive wealth taxes.

However, this is perhaps the only lesson that supporters have learned from the European experience.

California’s wealth tax, which is higher than any in Europe and applies to a much larger share of the wealth of highly mobile billionaires, doubles the economic damage that caused most European countries to abandon them.