A wealth confiscation tax has never been widely successful anywhere it has ever been attempted. Yet, some policymakers and pundits continue to support the concept of taxing unrealized gains and wealth thresholds. As the Laffer Curve explained decades ago, excessive taxation will have the opposite effect, as individuals respond by voting with their feet or seeking ways to circumvent punitive policies.
California, one of the most vibrant innovation ecosystems in the world, wants to slaughter the golden goose that lays golden eggs by punishing affluent investors and founders. The ballot initiative will bypass the legislature and the opportunity for a Gubernatorial veto by taking the proposal directly to the public. It has been estimated that there is sufficient support to enact the confiscation tax.
In response, it has been reported that approximately $2 trillion in wealth has fled the state. These tax refugees will no longer have to pay California’s state income tax, which is the highest in the country. The beneficiary of much of this wealth transfer has been Florida, which is home to a business-friendly government and zero state income tax. Many leading investors and entrepreneurs have shifted their residence to the Sunshine State.
Recently, the Dutch legislature approved a bill that would do something similar to what California is attempting to do. Policymakers intend to assess a 36% on unrealized capital gains, including crypto holdings. Of course, this would force many investors to sell their holdings, whether they want to or not. And, even more obtuse, if the value of these assets declines in the future, there is no recourse to recover their funds.
A European example of a failed wealth-confiscation tax is Norway, which enacted a tax that failed spectacularly.
In 2022, Norway instituted a 1.1% tax on high-net-worth individuals. The policy mandarins who supported this tax predicted that the new wealth-based tax would generate approximately $146 million in additional revenue. Contrary to the advocates of the tax, the new policy resulted in an estimated loss of $440 to $594 million to the state’s coffers. Overall, it has been reported that tax victims fled the country, removing around $54 billion in wealth as hundreds of millionaires and billionaires moved to more welcoming jurisdictions. In the long run, this reduces domestic investments, especially in key areas such as innovative startups.
So why is the Netherlands attempting to replicate Norway’s failure? The government faces a looming budget deficit that it cannot address through conventional measures, such as reducing government spending and supporting private investment to increase economic growth.
While the legislature could still adjust the tax proposal, the Netherlands is probably facing a wealth exodus, similar to that experienced by California and that occurred in Norway a few years ago.
Norway Shrugged 🇳🇴🤷
My story recently racked up over 100 million views on this website.
As a startup founder in Norway I was facing an unrealized gains tax bill many times higher than my net income. No politician ever told me how I’m supposed to pay the bill, but I got put up… pic.twitter.com/X9kvlVmgWU
— hagaetc (@hagaetc) November 28, 2024