“Bad ideas have long lives,” especially in progressive policy circles. The wealth tax is one of them.
At a recent panel at the Munich Security Conference, Rep. Alexandria Ocasio-Cortez (D-NY) was asked whether, if she ran for president, she would impose a wealth tax or a billionaire’s tax. Her answer was revealing. Americans, she said, “don’t have to wait for any one president to impose a wealth tax. I think that it needs to be done expeditiously.” The urgency is familiar. So is the idea.
I first encountered the wealth tax debate in 1987, when I served as economic counsel to former Sen. Robert W. Kasten Jr. (R-WI). That year, economist Ravi Batra shot to prominence with his bestseller The Great Depression of 1990. Batra warned that extreme wealth inequality would trigger an imminent economic collapse. His solution was a steep federal wealth tax — up to 5 percent annually on large fortunes — to reduce the national debt and avert catastrophe.
The catastrophe never came. The 1990s became one of the most economically dynamic decades of the 20th century. Growth surged, innovation flourished, and the federal budget moved from chronic deficits to surplus by decade’s end.
In November 1987, Sen. Kasten entered remarks in the Congressional Record sharply criticizing Batra’s proposal. A sweeping wealth tax to prevent a depression, he argued, bordered on “economic lunacy.” It would depress savings and investment, undermine capital formation, and fail to raise the revenue its advocates promised. He cited economist Richard Rahn, who noted that several European countries had already experimented with wealth taxes — and that “it has been a disaster.”
Time has vindicated that warning.
In 1990, a dozen OECD countries imposed annual net wealth taxes. Today, only a handful remain. European governments did not abandon them because inequality disappeared. They repealed them because the taxes proved economically damaging and fiscally underwhelming.
Consider Sweden. After decades of imposing a wealth tax, it repealed the levy in 2007 following years of capital flight and disappointing revenue. Wealthy individuals and business owners moved assets abroad, often legally, to minimize exposure to the tax. The government concluded the tax raised relatively little money while discouraging entrepreneurship and investment at home.
Germany followed a similar path. Its wealth tax was suspended in 1997 after the Federal Constitutional Court ruled that unequal treatment of different asset classes violated the constitution. Even before that decision, the tax generated modest revenue relative to its administrative complexity and economic distortions. It has never been revived.
France offers perhaps the clearest lesson. For years it imposed the Impôt de solidarité sur la fortune, a tax on net assets above a certain threshold. The predictable result was an exodus of high-net-worth individuals and chronic revenue shortfalls. Thousands of millionaires reportedly left the country during the tax’s tenure, taking capital, investment, and job creation with them. In 2017, President Emmanuel Macron dramatically scaled it back, replacing it with a narrower real estate tax. The broader wealth tax was widely viewed as harming competitiveness while yielding no fiscal benefit.
Even in the few countries that still impose wealth taxes — such as Norway and Spain — the revenue collections typically amount to well under 1 percent of GDP. That is a far cry from the sweeping fiscal cure often promised by progressive advocates.
At the same Munich panel where Ocasio-Cortez endorsed a wealth tax, Argentine politician Daiana Fernández Molero offered a blunt assessment drawn from her country’s experience: “Wealth goes away and you have just the tax.” It is a concise summary of what happens when capital proves more mobile than policymakers assume.
The United States already operates one of the most progressive tax systems in the developed world. It levies graduated income taxes, capital gains taxes, and an estate tax. The top 1 percent of earners pay a disproportionately large share of federal income taxes. The debate is not about whether the wealthy should contribute. It is about whether layering a federal wealth tax on top of the existing system would work as advertised.
The empirical record suggests it would not. Wealth taxes are difficult to administer, especially in an economy where much wealth is tied up in privately held businesses and hard-to-value assets. They encourage capital flight, reduce domestic investment, hurt job creation and consistently generate less revenue than projected. Countries that have tried them have, one by one, walked away.
Before Washington rushes to embrace a policy that much of Europe has discarded, it would be wise to ask why so many nations learned the same lesson the hard way: taxing wealth sounds compelling in theory, but in practice it shrinks the very base it aims to tap.
Bad ideas may have long lives. That does not mean we should keep resurrecting them.
Cesar Conda, a former Chief of Staff to former Senator Marco Rubio (R-FL), is a Founding Principal of Navigators Global and an Economic Advisory Board Member of Unleash Prosperity Now.
