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Wealth tax

Does the taxation of wealth have repurcussions on companies?

The wealth tax has been making headlines in recent years. While few countries still have a wealth tax, there have been lively debates around the possible introduction of wealth taxes in several countries, for example the U.K. and the U.S. Historically, most countries abolished wealth taxes in the 1990s and early 2000s. Norway is one of few developed nations that still has it.

The Norwegian wealth tax is a tax on an individual’s net wealth*. In 2018, the revenue raised from the wealth tax made up 1.1% of total Norwegian tax revenue and 0.6% of GDP. The proportion was higher only in Luxembourg (7.2% of total tax revenue and 2.9% of GDP in 2018) and in Switzerland (4.8% of total tax revenue and 1.3% of GDP in 2018).

*The tax base for the Norwegian wealth tax consists of an individual’s assets (real estate, bank savings, and securities including both listed and nonlisted shares) less the household’s debt. The value of net assets above the standard deduction is taxed at 0.85% (0.7% represents income for municipalities, and 0.15% goes to the central government).

Arguments for and against a wealth tax

A common argument in favor of a wealth tax is that it reduces inequality by increasing the tax contributions of the wealthiest individuals in society. Compared to other taxes, the wealth tax is also less likely to distort economic incentives for value creation.

An argument against the wealth tax is that most of the assets subject to the tax—such as shares in nonlisted companies—are illiquid. Business owners must pay the wealth tax in a given year whether the company generates positive cash flow or not. For small firms without easy access to external funding, the tax may restrict the resources they have available for investment. This is a reason why recent proposals about the introduction of a wealth tax in the US start from a high threshold. In comparison, the Norwegian wealth tax starts from a low threshold, although the standard deduction has gradually increased in recent years: from 120,000 in 2000 to 1,500,000 in 2020.

How much do business owners pay in wealth tax?

CCGR researchers have analyzed how Norwegian family-owned companies are affected by the wealth tax. (Family-owned companies are here defined as firms where members of one family together own at least 50 percent of the equity).

The data shows that around half of Norwegian family firms have owners that do not pay the wealth tax at all. For those that do pay wealth tax, Figure 1 shows the distribution of the amount in the year of 2015. For a given firm, the figure calculates the average of its owners’ tax payments. Firms’ averages are then allocated into 10,000kr.-size buckets ranging from 10,000 kr. and below to 290,000kr. and above. For example, the first column shows that in almost 7000 firms, owners pay between 0 and 10,000 kr. in wealth tax on average.

Overall, the distribution is highly skewed: in the majority of firms, owners in the majority of firms pay less than 50,000 in wealth tax. However, 2,500 firms (shown as one column) have owners that pay in excess of 290,000 kr. on average.  

Figure 1 Distribution of wealth tax payments 2015.jpg

Wealth tax relative to owners’ liquid assets

Even a relatively low tax payment of 50,000 kr. may be large for an owner with low wealth. To assess the effect of a wealth tax on companies, the relevant issue is the size of the tax relative to owners’ liquid assets. If owners do no hold cash or other liquid assets that can be used to pay the tax, they may have to withdraw resources from their firms.

Figure 2 illustrates the size of the wealth tax relative to business owners’ liquid net assets over time for different firms in the distribution (median, average, 75th, and 95th percentiles). For example, in 2000, owners’ wealth tax constituted 10% of their liquid assets in the average firm while the wealth tax of owners in the top 5% of firms constituted 40% or more of their liquid assets.

After 2000, the wealth tax has declined relative to owners’ liquid assets for the great majority of firms. Thus, for 75% of firms the tax is negligible relative to the owners’ net wealth. However, in around 5 percent of firms, the tax represents at least 20% of owners’ liquid assets. 

Figure 2 Wealth tax relative to owners liquid assets.jpg

Another relevant measure is the wealth tax compared to the revenue generated by the firm. When revenues are large, firms are more likely to have positive profits that owners can distribute as dividends in order to pay the tax.

Figure 3 compares the wealth tax to firms’ revenues. For 75% of firms, the tax payment makes up around 1% of annual revenues. For 5% of firms, however, the tax constitutes more than 8-16% of revenues.  

Figure 3 Wealth tax relative to firm revenue.jpg

Does the wealth tax have detrimental effects on Norwegian companies? 

The above figures show that the wealth tax can be substantial relative to owners’ liquid wealth and relative to the revenues generated in the firm. This in itself, however, does not imply that the tax have detrimental effects on firms’ performance and growth. While the tax for some firms and owners seem quite large, it may not effectively constrain those firms’ operations. To establish such causality, a statistical link from the tax paid by a particular owner to the performance of the firm needs to be established.

CCGR research shows how an increase in the tax on business owners’ residential real estate lead them to take out higher dividends and salaries from their firms, lowering the amount of cash held in the firm. Companies experience lower subsequent investment and growth. The effect is largest for owners whose liquid assets are low relative to the tax increase.

You can find the study here, and a summary of the research results here.

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