The centrifugal force of a wealth tax
Who really pays the bill when high incomes and wealth are taxed
The debate over a wealth tax returns periodically to the centre of the European and Italian political agenda: hammering wealth and high incomes is undoubtedly politically seductive and emotionally gratifying for the electorate.
Economics and history show, however, that treating the taxpayer as a static variable almost always becomes a boomerang for the public finances. The reason lies in an inevitable structural mechanism triggered as soon as taxation is perceived as unfair: capital flight.
When the tax burden crosses the danger threshold, a centrifugal force rapidly impoverishes the nation, pushing those affected towards the most welcoming centre of fiscal gravity.
The same applies to the equally brilliant idea of targeting the highest incomes: what happens, for example, if the state decides to impose disproportionate rates on those able to earn 20, 30 or 50,000 euro a month?
At those income levels we are almost never talking about passive capital, but senior executives, digital entrepreneurs, internationally renowned surgeons. Imposing punitive taxation on these sums produces three immediate side effects:
The relocation of talent: those earning such sums have complete global mobility. Within weeks they can decide to move their tax residence to Switzerland, Dubai or countries offering flat-tax regimes for new residents.
The elimination of domestic consumption: a very high income leaving the country does not merely stop paying direct taxes (such as IRPEF [Italian personal income tax]). It stops spending locally, wiping out revenue generated by VAT, luxury-goods taxes, property investment and the local supply chain.
The disincentive to growth: a state that retains almost all the additional income earned extinguishes the incentive to produce more, create new businesses or attract them.
History is a graveyard of taxes born to target opulence and ending up impoverishing the state. A few of the countless examples one could list:
Italy’s superbollo car surtax (2011): the tax on cars above 185 kW was supposed to bring in 168 million: around 60 arrived and, according to UNRAE [Italy’s association of foreign motor-vehicle manufacturers], the surcharge costs the treasury ‘120 million euro a year in lost revenue’ (our translation). Luxury cars fled abroad, wiping out revenue from ownership transfers, fuel and maintenance.
The US luxury tax on yachts (1991): the 10% levy on boats caused the domestic boating market to collapse and ‘over 25,000 skilled workers laid off’ (our translation), according to the boatbuilders’ association (a congressional committee estimated over 9,000 jobs lost across all luxury taxes). It was urgently repealed in 1993 to halt the unemployment-benefit costs it had caused.
Sweden’s repeal of its wealth tax (2007): exhausted by the flight of ‘over 500 billion kronor’ (our translation; the Swedish government’s estimate, over 50 billion euro) and the relocation abroad of founders of giants such as IKEA and Tetra Pak, Sweden had to scrap the tax to bring liquidity home.
England’s window tax (the historical example of 1696): to avoid paying, owners ‘literally bricked up the light’ (our translation), causing an urban health crisis.
Let us not forget that the rich have the legal and logistical means to move their centre of gravity two clicks away. When large pools of capital and substantial incomes leave the national borders, the state’s fiscal requirements do not disappear: they simply tighten around those who remain. It is perverse to promise greater fairness only to impose taxation on those who, unwillingly, are rooted in the territory. They are the ones left paying the bill for political rhetoric contradicted by the numbers.
Without real global multilateral coordination (such as the Global Minimum Tax discussed at the G20), any unilateral attempt to introduce a tax on net wealth or surtax high incomes produces a single mathematical result: the impoverishment of the national economic fabric. Treating capital and talent as static variables remains the gravest and costliest miscalculation a public budget can make.