Today Norway is one of a few countries which still use the wealth tax and the debate about keeping, changing or removing the tax are often reflected in the media and among politicians. In this post I will reflect upon the tax’ design and some of its socio-economic consequences.
In 2015 wealth tax amounts to 0.85 percent of a person’s net wealth that exceeds 1,200,000 NOK (approximately 130953 Euros). Different assets are assigned different values for the purpose of net wealth tax. For instance, bank deposits, shares in listed companies, and debt are assigned full value, while assets such as real estate and shares in non-listed companies are assigned a lower value.
From the figure we observe that the revenue from the wealth tax is relatively high in Norway compared to other countries. It also shows that neighbor countries have relatively higher taxes on property and inheritance than Norway. Note that in 2014 the Norwegian government eliminated tax on inheritance.
In 2014 a Commission set down by the Government published a report reviewing corporate taxation in Norway. The Commission identified the design of the wealth tax as the main problem: The valuation of different wealth assets vary too much.
A consequence of the unfavorable design is that Norwegians are motivated to change their savings towards assets that are assigned lower values or are exempted from net wealth tax, for instance towards real estate.
A possible solution
It is often argued that commercial property and “working” capital should be exempted from the wealth tax. However, the Commission advises against this solution because it would reinforce the distorting features of today’s wealth tax. In general, those with the highest wealth have placed it in business activity, and therefore this solution would primarily impact those who have wealth in the form of bank deposit or real estate without debt. Hence, the exemptions would be an advantage for those who already own the most and the distributional effects of the wealth tax would be reduced.
A policy instrument for redistribution
The Commission’s opinion is that the wealth tax contributes significantly to vertical equality, meaning that it causes persons with high income to pay higher taxes. While the tax’ contribution to horizontal equality, similar individuals should be taxed equally, is smaller due to the unequal distribution between different assets.
Removing, keeping or changing?
The Commission advises against a removal of the tax. They’re conclusion is that that provided a more uniform valuation and a more moderate tax rate, a tax on net wealth can be justified in the interests of both efficiency and redistribution. In particular, they encourage a more consistent valuation of real estate, which is already treated favorable in the overall Norwegian tax system.
In conclusion, my opinion is that the wealth tax is an important instrument for distribution policy and should therefore be kept. However, the Commission’ reports makes it clear that changes are necessary to ensure a higher degree of horizontal equality and to minimize the tax’ distortions.
By: Birgitte Ringstad, Student from the Masters in Economics