Tax the rich more? The wealth tax failed across Europe and was repealed

The wealth tax is the only policy I know that has been tried, abandoned and then re-proposed with the confidence of a first-time idea. Europe ran the experiment. Europe wrote up the results. Europe, for the most part, shut the experiment down. And an ocean away, politicians announce it as though it were fresh from the laboratory.

Let me lay out the evidence, in order, and then do the arithmetic that the slogans leave out.

Define the thing

An income tax takes a share of what you earn in a year. A wealth tax is a different animal. It takes a share, every year, of what you own: the stock, the house, the business, the art on the wall, the farm, the pension, minus debts. Own $100 million and face a 2 percent annual wealth tax, and you owe $2 million every year whether or not you earned a cent. The technical name is a net wealth tax, because debts are subtracted from assets before the rate is applied.

It differs from the estate tax, which is levied once at death, and from a property tax, which a local government levies on land and buildings. It reaches everything. That reach is both its political appeal and its practical problem.

The record: twelve countries, then four

The most useful single document in this debate is a 2018 report from the Organisation for Economic Co-operation and Development, titled "The Role and Design of Net Wealth Taxes in the OECD." The OECD is not a conservative think tank. It is a club of rich-country governments that studies tax policy, and it has been no enemy of high taxes. Its report found that twelve OECD countries levied a net wealth tax in 1990 and that by 2017 only four still did.

The countries that dropped the tax include Austria in 1994, Denmark and Germany in 1997, the Netherlands in 2001, Finland, Iceland and Luxembourg in 2006, and Sweden in 2007. By 2017 the four holdouts in the OECD's count were France, Norway, Spain and Switzerland. Some of those four taxed wealth at modest rates, and in Switzerland the tax is levied by the cantons, not the national government.

The OECD's own summary of why countries gave it up is worth paraphrasing, because it comes from the people you would expect to defend the tax. It says that decisions to repeal net wealth taxes have often been justified by efficiency and administrative concerns, and by the observation that the taxes frequently failed to meet their redistributive goals. It says the revenues collected have, with a few exceptions, been very low. And it concludes that net wealth taxes tend to be more distortive and less equitable than taxes on personal capital income, because they are charged whatever the asset actually earns, so that the arguments for one on top of a broad capital income tax and well-designed inheritance and gift taxes are limited. In fairness, the same report argues that there is a strong case for addressing wealth inequality through the tax system, and it does not rule out a net wealth tax where capital income and inheritances go largely untaxed. My argument is that the American tax system does tax capital income and inheritances, so the report's own logic points away from adding a wealth tax here.

Read those findings again. They are not the complaints of an advocacy group. They are the conclusions of an international organization of governments that had every reason to look for a reason to keep the tax.

France: the cautionary tale

France is the case worth studying, because it ran the tax long and tried hard.

France introduced a tax on large fortunes in 1982, under a Socialist government. A conservative government abolished it in 1986. Socialists restored it in 1988 in the form of the impôt de solidarité sur la fortune, the solidarity tax on wealth, usually written ISF. It stayed on the books for about thirty years. Over that time, French politics produced a steady stream of stories about wealthy families and entrepreneurs leaving the country, and about the tax's unpopularity with the people it was meant to reach. The numbers behind those stories are disputed, and I will not hand you a figure I cannot source. What is not disputed is the outcome.

In 2018, President Emmanuel Macron's government replaced the ISF with a much narrower levy, the impôt sur la fortune immobilière, or IFI, a tax on real estate wealth only. Financial assets and business holdings were taken out of the base. That was a country that had run the experiment for about thirty years and decided to keep a small piece of it. The government's argument was that the old tax pushed capital out of productive investment and out of the country, and that a levy on real estate, which cannot move, was a more sensible target. That is a concession of the point.

The valuation problem

The administrative reason the tax fails deserves its own section, because it is the part supporters like least.

An income tax runs on transactions. You were paid, and there is a record: a paycheck, a dividend, a sale price. A wealth tax runs on valuation, and for most assets nobody has recorded a price this year. A publicly traded share has a price each day. A privately held company has none. A farm has no price until it sells. A painting has an estimate until the auction. A patent, a partnership interest, a stake in a family firm, an unfinished invention: each requires an appraiser, and every appraiser is hired by someone with a stake in the answer.

Think about what that means for a founder holding a private company worth, on paper, a vast sum. He may have no cash at all. To pay a 2 percent annual tax on the paper value, he must sell shares or borrow against them, every year, forever. Sell enough shares and he loses control of the company he built. And the tax authority must decide what a company with no market price is worth, so the founder and the tax collector argue about the figure in court. The administrative cost is not a side issue. It is a large part of why the tax collects so little.

For the same reason, a wealth tax rewards those who hold their wealth in assets that are easy to value and easy to hide, and punishes those whose wealth is tied up in a business, a farm or a stake they cannot split. I have written elsewhere about a related distortion in capital gains taxes and the lock-in effect that keeps money frozen in place: a tax that depends on when and how you hold an asset changes how people hold it.

The arithmetic of a 2 percent tax on a 5 percent asset

Now the part with numbers. Suppose an asset earns 5 percent a year. A good return, a stock portfolio on an ordinary year. Suppose a wealth tax of 2 percent is levied on the full value every year.

• A $100 million asset earns $5 million. The tax is $2 million. The owner keeps $3 million.
• The tax took 2 of the 5 dollars of return. That is 2 divided by 5, which is 40 percent of the yield. A 2 percent tax on wealth is a 40 percent tax on a 5 percent return.

Now add the ordinary tax. Suppose the $5 million of return is also taxed at 25 percent as income. That takes $1.25 million. The wealth tax takes another $2 million. Total tax: $3.25 million out of a $5 million return, which is 65 percent. The owner keeps $1.75 million.

Next, compound it. Over twenty years, $100 million growing at 5 percent a year, with nothing taken, becomes about $265 million, because 1.05 raised to the twentieth power is about 2.65. The same asset, growing at 3 percent after the 2 percent wealth tax, becomes about $181 million, because 1.03 raised to the twentieth power is about 1.81. The tax has removed more than $84 million of wealth, about a third of the final sum, from an owner who has never sold a thing.

If the return is lower, the math is worse. At a 2 percent return, a 2 percent wealth tax takes all of it, and the asset does not grow at all. At a 1 percent return, the owner is paying more in tax than the asset earns, and the asset shrinks. In a bad year, when the asset loses value, the tax still arrives. An income tax cannot take more than you earned. A wealth tax can, and often does.

That is why people who must choose between paying and fleeing sometimes flee. And it is why the capital that remains tends to move toward assets that are hard to tax, which is not where an economy needs it to go.

The steelman: "inequality demands it"

The best case for a wealth tax, as its defenders would state it, runs like this.

One, wealth is concentrated, and the concentration grew over decades. Two, a great deal of wealth is held in the form of unrealized gains, which are not taxed under the income tax until sold, and may never be taxed if the owner holds until death. Three, an income tax therefore misses the biggest fortunes, and a wealth tax closes the gap. Four, the revenue could pay for public goods, and the political stability of a republic depends on avoiding great concentrations of private power.

It is a serious argument, and the second point is true: the income tax does not reach unrealized gains, and the step-up in basis at death does allow some gains to escape tax. But the proposed answer fails for the reasons above. The countries that tried it found that the base did not stay put, that the valuation problem swallowed the administration, and that the revenue was small. If the aim is to tax gains that escape, there are narrower tools, such as changing the treatment of assets at death, and the debate about them is a real one that does not require a tax on holding wealth.

The constitutional question

Americans have a further problem, which Europeans did not: the Constitution.

Article I, Section 2, Clause 3 says that "Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers." Article I, Section 9, Clause 4 says that "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken."

A direct tax, under those clauses, has to be apportioned among the states by population. That produces absurd results for a tax on wealth. A state with fewer rich people and more people would pay the same per-capita share as a rich state, and so would have to tax its wealthy residents at a far higher rate to meet its quota.

The Supreme Court's early cases suggested that "direct tax" meant a tax on land, or a head tax. In 1796, in Hylton v. United States, the Court held that a tax on carriages was not a direct tax. In 1895, in Pollock v. Farmers' Loan and Trust Company, the Court held that a tax on the income from property was a direct tax. The Sixteenth Amendment in 1913 reversed that result for taxes on incomes. It did not mention wealth. A tax on the ownership of property, which is what a net wealth tax is, looks much more like the tax the Founders meant by "direct" than a tax on income does.

Defenders of the wealth tax say it could be framed as an excise, or that the Court's reading of the clauses would shift. In its 2024 decision in Moore v. United States, the Court upheld a one-time tax on foreign-company earnings and went out of its way to say it was not deciding whether a tax on unrealized gains or on holdings would pass. The question is open. A conservative should not predict how it will be answered; a conservative should insist that a tax of this magnitude be put to the Constitution before it is put to the voters. The text is on the Constitution page.

The answer: tax less of the problem, not more of the person

So what should we do about a concentration of wealth that worries people? Here are the numbered points.

One: grow the pie. The way to widen ownership is to make it easier for ordinary people to start and hold assets. A tax on holding savings makes that harder. A conservative reform agenda cuts taxes on saving and investment and sweeps out rules that protect incumbents; see big companies love the regulations their small rivals cannot afford.

Two: fix the edges of the system we have. If the income tax's treatment of gains at death is a problem, say so, and argue the specifics. There is a legitimate conversation about it, and it does not need a new constitutional category of tax.

Three: look at who really pays. The top of the income scale already carries a large share of the federal income tax, as the IRS's own tables show in Who actually pays the federal income tax, read straight from the IRS tables. The claim that the rich pay nothing is false for the income tax and is mostly true only for a narrow set of assets.

Four: remember the lesson of the people who tried it. The OECD did not report a policy that was working and then dropped it because of politics. It reported that repeals were driven by efficiency and administrative concerns and that revenues were very low. When a tool has failed in most of the countries that built it, the burden is on those who want it to explain what is different this time.

The case in brief

1. A net wealth tax takes a share of what you own each year, not what you earn, so it can take more than an asset yields.
2. The OECD's 2018 report found twelve OECD countries with the tax in 1990 and four in 2017, and its report tied the repeals to efficiency and administrative concerns and very low revenue.
3. France ran the tax for about thirty years and in 2018 replaced it with a tax on real estate only.
4. A 2 percent tax on a 5 percent asset takes 40 percent of the return, and over twenty years it turns $265 million into $181 million.
5. A tax on holdings faces a serious problem under the direct tax clauses of Article I, and Congress should settle that before spending political capital on it.

What you can do: read Article I, Section 9, Clause 4 on the Constitution page, then write to your representative asking whether any wealth tax bill has a constitutional analysis attached, and what it says.