“If you want less of something, tax it,” the old adage goes. If that is the case, why is a prominent European newspaper reporting that the number of millionaires increased after one nation introduced a wealth tax?
“Number of super-rich in Spain grows 74% since reintroduction of wealth tax,” a headline in Spain’s El Pais reported recently. Here are the facts:
Spain introduced a wealth tax (Patrimonio) in 1977 as a “temporary” measure. In 1991, lawmakers admitted the 14-year-old tax would be permanent. The government gradually offset the tax by offering a tax credit which, by 2008, eliminated 100 percent of the wealth tax. However, lawmakers never expunged the law from the books. During the 2011 recession, cash-strapped Socialist Prime Minister José Luis Rodríguez Zapatero reintroduced the wealth tax shortly before losing the election to Popular Party candidate Mariano Rajoy.
The new wealth tax applies to anyone with total global assets of €700,000 ($774,000 U.S.). Those whose primary residence is in Spain receive another allowance of up to €300,000 for their home, or double that amount for married couples. Those with an estimated wealth above this amount pay a graduated wealth tax, ranging from 0.2 percent to 2.5 percent annually.
A number of factors further complicate matters. Not all items count as wealth in the government's complicated reckoning. The federal government devolved implementation of the Patrimonio to the provincial level, meaning that the nation is a patchwork of 17 different wealth tax policies. (Not all collect the Patrimonio; see below.) And the total wealth tax collected may not exceed 60 percent of the couple's tax base of savings-plus-wealth income; however, the tax bill may not fall beneath 20 percent of the wealth tax total.
Did the number of wealthy "grow" after the wealth tax was reintroduced?
This system did nothing to increase the number of wealthy. The article makes its contention through an accounting trick: In 2012, Rajoy offered a discounted 10 percent tax rate on “black money” not declared since 2007, the year before the wealth tax was abolished. The El Pais article notes that this amnesty “uncovered €40 billion” in hidden wealth. In 2013, the government demanded that taxpayers reveal all undisclosed assets worth more than €50,000 or face a fine of €10,000, as well as taxes and penalties of up to 150 percent of the hidden wealth’s value. After collecting the declaration forms, Modelo 720, the government “uncovered €156 billion in assets that Spanish residents were keeping abroad,” El Pais reports.
Clearly, the number of millionaires did not increase. Tax incentives merely reduced millionaires' incentive to underreport their pre-existing, untaxed wealth. The number of Spanish millionaires actually fell by 94,000, or 21 percent, in 2014 alone, according to Credit Suisse. This is due in part to the wealth tax, in part to nation’s economic downturn, and in part to wealthy Spaniards leaving the country. A similar situation prevailed in neighboring France, where 42,000 millionaires fled the country between 2000 and 2012 to avoid its solidarity wealth tax (ISF). (President Emmanuel Macron converted the ISF into a graduated real estate tax in 2017.)
Their behavior bears out a 2017 study that found “taxpayers responded to positive [wealth] tax rates by adopting avoidance strategies which consist on moving assets from taxable to non-taxable wealth.”
Destroying fortunes: A feature, not a bug?
Had the wealth tax increased the number of large fortunes, many of its proponents would have considered it a failure. Democratic socialists and other progressives believe large accumulations of wealth are immoral, however they are gained, and a wealth tax should prevent more people from becoming millionaires and billionaires. “A wealth tax would gradually tax a portion of the wealth that has accumulated over the past several decades as the structural failings of the tax code enabled extreme wealth accumulation, while also placing a check on the accumulation of even larger fortunes going forward,” wrote the Center for American Progress in its report on the wealth tax this June. Oxfam, which releases an annual report on wealth inequality, expresses the idea more tersely: “End extreme wealth.”
The reporting of previously sheltered wealth in 2012 and 2013 did not increase the number of Spain's millionaires. These millionaires retained their financial status by sheltering their income from taxation or otherwise underreporting their assets to the government until the government offered a tax abatement. The wealth was accumulated in spite of, not because of, the wealth tax.
Spain’s history proves that the wealth tax incentivizes the most affluent citizens to flee the country, invest abroad, or engage in tax avoidance. This may explain why nine European nations have abolished their wealth taxes since 1990. In fact, Madrid still offers a 100 percent offset for the tax, and Andalusia will virtually abolish the wealth tax this year.
Their experience holds lessons for the United States, as Senator Elizabeth Warren has proposed what she calls the “Ultra-Millionaire Tax,” an annual levy of two percent on fortunes valued at $50 million and three percent of fortunes at $1 billion or more. A wealth tax reduces wealth, punishes the industry and frugality of those who used their God-given talents to create wealth or accrue a large savings, and deprives Christians of the opportunity to voluntarily share their wealth through acts of charity.
This headline is misleading: False.
(Photo credit: Kathy Hutchins / Shutterstock.com. Editorial use only.)