In a weird coincidence following yesterday's post about the challenges of taxing the super-rich, the Financial Times published an article on the same topic overnight, making some of the same points:
Income taxes and social security contributions, along with sales taxes, tend to be the main revenue-raisers in developed countries. But they do not address the capital wealth of the super-rich, which is often concentrated in real estate, investments or equity in businesses.
Yet imposing higher capital taxes on a relatively small number of very wealthy individuals often prompts changes in their behaviour that limit or even reduce the amounts raised. Raising taxes on the moderately wealthy, a much larger and less mobile cohort, usually has consequences at the ballot box.
The history of wealth taxes provides a prime example. In the mid-1980s, about half of OECD countries imposed an annual net wealth tax on their richest inhabitants. Today, in Europe only Spain, Norway and Switzerland retain taxes on individuals’ overall net wealth — and they raise relatively small amounts.
“Given the rich are extremely mobile and less and less attached to the country that made their wealth, they can shift and they do,” says Pascal Saint-Amans, a former head of tax at the OECD. “I suspect if you were to ask most billionaires, ‘Where is your loyalty, with your country or with your money?’, most would say, ‘My loyalty is with my money.’”
Interestingly though, the article also presents a potential solution:
One option to address the issue of the rich simply moving their assets elsewhere is the exit tax. Australia, Canada, France, Germany and Japan are among the 14 OECD countries that tax unrealised capital gains for those who change their tax residence, while the US taxes individuals who relinquish their citizenship.
“Tax flight happens less than most people think, but it does happen,” says Arun Advani, director of CenTax, a UK based think-tank, and professor at the University of Warwick. But, he adds: “It’s a policy choice to let them emigrate tax free.”
An OECD working paper on capital taxation this year agreed that exit taxes could curb revenue leakage and discourage tax-induced migration, though it added that these objectives needed to be balanced against other policy aims “such as attracting and retaining talent and entrepreneurs”.
That OECD working paper is available here, and is well worth a read. Exit taxes do sound like a potential solution to the negative incentive effects of wealth taxes or higher taxes on capital income. However, the working paper does not offer a strong endorsement of the effect of exit taxes on curbing out-migration of wealthy taxpayers. Instead it notes that:
...no empirical research on the impact of exit taxes on inward migration and entrepreneurship is yet available.
That definitely suggests a relevant research gap for someone to fill. Since we already have evidence (from the paper I discussed yesterday) of the large incentives for out-migration created by wealth taxes, it would be good to be able to quantify how much that incentive could be offset using an appropriately designed exit tax.
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