Wealth Taxes: What Should Investors Know?

Wealth taxes are back in the headlines ‍

We hope you are enjoying your last stretch of summer! Although Congress often pauses actual legislative work this time of year, policy debates rarely slow down for long. Once again, wealth taxes are back in the conversation. Proposals are circulating in California, New York, across the European Union, and in countries like France and Denmark. The pitch sounds simple: tax the ultra-wealthy on what they own, not just what they earn, and use the proceeds to address inequality. ‍

It is not a new idea, and we now have decades of real-world data on how it actually plays out. The track record is not encouraging. ‍

A quick distinction before we get into it. A wealth tax is different from the income and capital gains taxes you already pay. Instead of taxing what you earn or what you gain when you sell an asset, it taxes what you own, every year, based on its total value, whether or not you sold anything or received any cash. That last part turns out to be the source of most of the trouble. ‍

What history tells us ‍

Since the 1960s, at least 13 OECD countries have tried a broad net wealth tax, and most have since repealed it.* The pattern has been pretty consistent, with governments discovering the tax pushes capital and wealthy residents elsewhere, adds heavy administrative cost, and raises far less revenue than projected. Today, the handful of countries still running one, including Spain, Norway, and Switzerland, collect only modest amounts from it, generally somewhere between 0.2% and just over 1% of GDP. ‍

France offers the clearest cautionary tale. Its wealth tax, known as the ISF, generated less than 0.2% of GDP even after decades of adjustments before it was scaled back in 2018. Between 2000 and 2017, tens of thousands of millionaires reportedly left the country while it was in force. France’s own finance minister later pointed to the tax as a barrier to attracting investment. ‍

People and capital move ‍

The core problem with taxing wealth rather than income, is that the targeted base is mobile. When Norway raised its wealth tax rate by just 0.1 percentage point, it saw a noticeable outflow of wealthy residents, many heading to Switzerland. When Spain introduced a new levy on large fortunes, Portugal responded by expanding its own tax break for new residents, anticipating exactly who would be arriving. ‍

We saw a version of this play out with Washington State’s 2023 proposal for a 1% tax on net worth above $250 million. State economists projected it would raise about $3.2 billion a year, with 45% of that, roughly $1.44 billion, coming from one person: Jeff Bezos. He relocated to Florida before the measure could take effect, and nearly half the projected revenue went with him. ‍

California is watching a similar dynamic unfold with its proposed billionaire tax. As soon as the idea reached the ballot stage, Google co-founders Sergey Brin and Larry Page began moving assets out of the state. A Hoover Institution analysis suggests that once high earners relocate and their income tax contributions disappear along with them, the policy could produce a net cost to the state of around $25 billion, rather than a gain. ‍

The design problem ‍

Beyond who leaves, there is the question of how you value what stays. California’s proposal is a one time 5% tax on billionaires’ net worth, but there are some significant gaps in the proposed language. DoorDash CEO Tony Xu is one example, he owns 2.6% of the company but controls 57.6% of its voting shares through a dual class structure. Under one reading of the bill’s language, that voting control alone could generate a tax bill on his ownership stake larger than the stake is worth, before any capital gains taxes on shares he’d have to sell to pay it. The bill’s authors say that is not the intent, but the ambiguity is still there, and it is the kind of thing courts tend to end up sorting out. ‍

Which leads to the other recurring theme of legal challenges. Germany’s constitutional court struck down its wealth tax in 1995. Dutch courts have ruled parts of wealth taxation incompatible with property rights protections. Spain has a case pending that could reshape its own tax. This is not unique to any one country. It shows up almost anywhere a wealth tax gets tried. Governments must also identify, value, audit, and collect tax on assets that may be private, international, or difficult to sell. These complex rules end up consuming revenue through administration and professional fees. ‍

Differing opinions ‍

Supporters of wealth taxes argue revenue was never really the point, or at least not the only point. They see it as a direct way to address inequality and rebuild trust in the system, even if the dollar amounts collected stay modest. It is a values-based argument more than a purely economic one, and reasonable people land in different places on it. The data above speaks about whether these taxes work as designed. Whether they are worth trying anyway is a separate, more political question. ‍

Why this matters for your planning ‍

Most of you will not owe a wealth tax under any current proposal. These plans target net worth in the tens or hundreds of millions. But the broader conversation still matters, because it shapes the environment your investments and estate plan operate in, especially if you hold a concentrated business stake, own significant illiquid assets, or are thinking about where to establish residency in retirement. ‍

It also matters if you are watching a state you have ties to move in this direction. Even a proposal that never passes can affect things like where a business owner chooses to domicile a company, or how a retiree thinks about splitting time between states. If any state where you have ties moves forward with something like this, it is worth a conversation before it takes effect, not after.

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*Facts in this article sourced from: https://www.fa-mag.com/news/why-wealth-taxes-always-fail-88019.html