What Fiscal Policy Is Worse than a Wealth Tax?

October 3, 2022 by Dan Mitchell @ International Liberty

A wealth tax is an extraordinarily destructive way for governments to generate revenue.

It violates the principles of sensible tax policy and it does a lot of damage since people have less incentive to save and invest. It’s unadulterated double taxation. Or, in some cases, triple or quadruple taxation.

And it’s unfair.

These factors explain why many nations in Europe have abolished their wealth taxes. This map from the Tax Foundation shows the holdouts that still pursue this senseless version of class warfare.

You’ll notice that Spain is one of the few countries that still has this punitive levy. And if you want to learn more about the Spanish version of this levy, you can click here and here for thorough summaries.

But one thing that everyone should understand is that politicians are always capable of making a bad situation worse.

And as you can see from this story by Grace Dean for Business Insider, that’s precisely what the Spanish government is doing by imposing a second wealth tax on the country.

Spain has introduced a second wealth tax amid soaring inflation, adding an extra 3.5% tax on top of wealth over $10 million. …To avoid people being double-taxed, the tax will only apply to the part of people’s assets not already taxed by their autonomous community, the government said. People will be taxed at a rate of 1.7% on assets between 3 and 5 million euros, 2.1% on assets between 5 and 10 million euros, and 3.5% on assets of more than 10 million euros (around $9.76 million). The government said that it was a temporary state tax for 2023 and 2024… The government is also raising taxes on companies with at least 200 million euros in annual income and expects to bring in an additional 200 million euros by increasing taxes on capital gains above 200,000 euros.

The title of today’s column asks “what fiscal policy is worse than a wealth tax”?

The obvious answer is two wealth taxes.

 

Though I’m not sure why people are referring to this levy as a second wealth tax when it could be considered an expansion of the existing wealth tax.

But semantics don’t matter. What is important is that this levy will backfire.

I explained back in 2019 that a wealth tax is basically a back-door way of increasing the tax burden on income that is saved and invested.

This is a very bad idea in theory, for reasons explained here and here, but most people do not realize how bad it is in practice.

It can result in effective tax rates of more than 100 percent.

That’s already happened to some French taxpayers.

And it almost surely will happen to some Spanish taxpayers, particularly since financial markets are not exactly enjoying a good year.

Hardly a recipe for improved competitiveness and faster growth.

But also hardly a surprise given the harsh ideological perspective of the leftist parties governing Spain.

P.S. I predict Andorra will be the big winner.