Understanding Wealth Taxation: An Overview of International Trends and Economic Implications

1. Taxing wealth Student introduction April 9th 2010 Andreas Tveitereid ant@fin.dep.no

2. Taxing wealth – main topics • International trends • Basic economic arguments • Current Norwegian rules • Recent amendments in Norway • Equality, fairness and politics

3. International trends • Norway, Canada, France, Luxembourg and Switzerland issue wealth tax in the OECD • Several countries have abolished the wealth tax in recent years – among others Spain and Sweden • The wealth tax is normally associated with generous basic allowance • The wealth tax must be seen in relation to the property tax • In Norway, the combined tax on property and wealth is 2 pct. • OECD average is 5,5 pct • US and Canada have ~10 pct. on properties

4. Basic economic arguments • PRO • Wealth is just as suitable as taxbase as income • Nice distributional effects • Fills a fiscal need • Additional tax on capital income • Tax on gently taxed items (property – profit not taxed) • Tax on profit can contribute to ineffective capital lock-in effects - the wealth tax counteracts this • Residential tax – must move to avoid the tax • Based on net wealth - property tax on gross value • CONTRA • Difficult to value all wealth objects at market value creates distortions • Weakens access to capital for small firms, specially in a non-efficient capital market (retained earnings) • Differs between nationality – different demand for return on capital after tax – can result in capital owners moving abroad • Does not depend on income, require cash-flow. Political demand for exceptions (pensioners in large villas)

5. Current wealth tax rules (Norway) • Tax rate 1,1 pct. of net taxable wealth (individuals) • Local government 0,7 pct. • Central government 0,4 pct. • Basic allowance 700 000 NOK • No wealth tax for the business sector (a few exceptions) • Estimated government take 12,8 billion NOK in 2010 (1,5 pct. of total) • Main weakness: undervaluation of property • Consequence: the tax system contributes to overinvestment in property

6. Recent wealth tax amendments • Stocks valued at market prices (up from 65 pct.) • Considerably increased basic allowance (almost fivefold) • Removed “80-per cent” rule • Commercial property values based on rent/market value • Private property (homes) values based on estimated market value

7. Wealth tax amendment – illustration • Large apartment Frogner/Oslo (1916) • Price 17,5 mill. NOK • Taxable value 650 000 NOK (3,7 pct.) • 284 sqm, new taxable value 3,5 mill. NOK (20 pct.) • Basic house Rjukan (1976) • Price 1 050 000 NOK • Taxable value 532 000 NOK (51 pct.) • 148 sqm, new taxable value 262 500 NOK (25 pct.) • 2 bedroom flat Grorud/Oslo (1955) • Price 1 750 000 NOK • Taxable value 165 00 (9,5 pst) • 64 sqm, new taxable value 430 000 NOK (24,5 pct.)

8. Equality, fairness and politics

9. Summary and conclusion • Few OECD countries issue a tax wealth • Uniform valuation principles essential • Wealth tax is an effective redistribution tool • Still room for improvement in the Norwegian system • Property is undervalued compared to market price • Vacation properties are not valued based on market value • Politically challenging to tax wealth in the form of property

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