November 4, 2024
Anti-Taxers on the run in Europe
Dear Reader,
The Cayman Islands. Bermuda. The British Virgin Islands.
You’ve probably heard about such jurisdictions on account of their favourable tax laws, and attractiveness for those looking to protect as much of their wealth as possible.
Tax havens, they call them.
Well, today we’re not looking at a tax haven so much as a tax hell — at least for the very wealthy.
I wrote about this country recently on account of its remarkable sovereign wealth fund, and the lengths it goes to to enrich its citizens by owning a piece of nearly every listed company on earth.
But, this is about the other side of that coin.
Tens of billions taking flight
Norway is not a tax haven.
The land of fjords and oil wealth is experiencing a peculiar phenomenon — its richest citizens are taking their money and escaping south, to Switzerland.
Why?
Because the government recently started demanding a bigger slice of their wealth.
Here are the headlines:
In 2022, more than 30 Norwegian billionaires and multimillionaires bid ‘farvel’ to their homeland.
For context, that’s more than left the country in the previous 13 years combined.
But why the sudden flight?
A double whammy is why.
Prime Minister Jonas Gahr Store has introduced higher wealth and dividend taxes.
Norway is one of the few remaining countries in Europe with a wealth tax.
In 2022, the government decided to increase the wealth tax from 0.85% to 1.1% on the largest fortunes.
On $1 billion, that takes your annual wealth tax from $8.5 million to $11 million.
On top of that, you’ll pay more on any dividends you earn from that wealth.
🇨🇭Going where they’re treated best🇨🇭
Switzerland
Wealthy Norwegians are choosing Switzerland as their escape plan.
The rich, exclusive nation nestled in the heart of central Europe promises much for many, particularly for the exceptionally rich.
While Switzerland also has a wealth tax, the country offers deals for foreigners that can bring the rate down to as low as 0.1% in some cantons.
So that $11 million you’d pay on $1 billion in Norway?
You’d potentially pay just $100,000 on that same amount in Switzerland.
According to Bloomberg:
‘Store’s tax-the-rich push has pitted traditional Nordic concepts of equality and social justice against claims that the measures penalize success and hurt the economy.
‘The 63-year-old prime minister has called the emigration of wealthy people “a breach of a social contract”.’
Forcing their wealthiest to flee is hitting Norway’s finances.
Kjell Inge Røkke, Norway’s third-richest man, is among the wealth tax refugees.
His move to Switzerland has cost the Norwegian government roughly $16 million annually in lost tax revenue — more than a million dollars a month.
At the time of writing, it looks like nearly 100 wealthy Norwegians have hit the eject button, and taken their money south to Switzerland.
Wealth creation vs. wealth distribution
Louis XIV: Taxed the people so hard they revolted
As you can imagine, the situation has inflamed an already heated debate.
Erlend Grimstad, secretary of state at the Norway Ministry of Finance, states:
‘People benefit from free education, national infrastructure, free health care, subsidized preschool child care, generous leave rules, and corporate tax in line with other countries. This means that successful people with this social model should contribute more than others.’
On the other side, the wealth creators argue that the wealth tax forces them to withdraw capital from their companies to pay it, which is bad for growth, business development, and employment.
Tord Kolstad, one of richest 400 Norwegians, says the government’s policy represents a misunderstanding of the nature of his wealth:
‘My value is not in owning money, it’s in factories, houses, buildings… I still have to pay 2% or 3% a year to the government just to own it. And I believe that this taxation is the reason there will be fewer jobs, and less investment — and then less welfare.’
Now here’s the kicker.
The wealth tax, intended to generate more revenue for the state, might end up doing the opposite.
Norwegian Business School professor emeritus, Ole Gjems-Onstad, estimates that the wealthy Norwegians who’ve left took with them a total fortune of $54 billion.
This exodus could result in about 40% less revenue than the wealth tax currently generates.
Take a look at this:
Source
What this shows you, is that by trying to generate national wealth by taxing private wealth, a country can, in fact, end up making itself poorer.
Which brings us to a nifty little chart.
Who’s Laffering now?
This is the Laffer Curve:
Source
This ‘mound-shaped’ indicator is a method for determining — if such a thing were to exist — the ideal tax rate.
By ideal, I mean one that helps both the government, and the people that government serves, prosper in equal measure.
It takes its name from economist Dr. Arthur Laffer — although the idea first appears in Muslim philosopher Ibn Khaldun’s 14th-Century work The Muqaddimah.
You can dig into the theory behind the indicator here.
But for now, let these excerpts from Laffer’s theories serve to illustrate, at least in part, what’s happening with Norway’s wealthiest right now (my emphasis added):
‘Higher taxes discourage business activity and drive down tax revenues.
‘For example, high taxes encourage the creation of tax shelters and encourage business activity that generates paper losses from depreciable assets rather than business activity that creates jobs and generates revenue.
‘Money spent on plush office suites, the purchase of private jets, and the leasing of luxury cars becomes more advantageous (because of the ability to lower marginal tax rates) than business activity designed to generate a profit.
‘Businesses may tend to choose to be less productive to be more profitable.’
Benjamin Franklin, the man whose wisdom about investing in knowledge we’ve based this email on, said that nothing could be said to be certain, except death and taxes.
I would add to that by saying that the former, in many ways, is more simple than the latter.
The Norwegians appear to have pushed a little too far along the Laffer Curve.
With capital and wealth more mobile than ever before, the way in which governments treat their highest taxpayers looks like it needs to evolve.
Speaking of evolution…
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This is by far the most detailed, in-depth such video review you’ll see of our platform and everything it helps investors with — including tax calculation and optimization.
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Quote of the Week
‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.’
— Jean-Baptiste Colbert, finance minister to France’s Louis XIV
That’s it for The Benchmark this week.
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Invest in knowledge,
Thom
Editor, The Benchmark
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