Nova workboard

a blog from young economists at Nova SBE

Next Country to Cut the Wealth Tax?

A minority of countries in the developed world (with only four in Europe) have taxes on wealth. Sweden and Finland are two of the countries that have been removing the tax over the last decade.

Taxes are always a hot topic, especially when elections are approaching (in my case the Norwegian Parliamentary election). The two biggest parties are in conflict of the future of the wealth tax on corporations. The party in opposition, the Labour Party intends to increase the tax, while the currently ruling party, “Høyre” a conservative party wants to gradually remove the tax.

The recent debate is primarily focused around how the wealth tax is affecting businesses. Business owners argue that removal of the wealth tax will increase the number of jobs and thereby stimulate economic growth. According to studies by NHO, the main representative organization for Norwegian companies, among 60% of the business leaders believe they would hire more workers it the wealth tax is removed.

There are several reasons for this. First, the wealth tax could be distorting competition as it favours foreign companies where wealth tax is non-existing.

Second, the wealth tax facing firms is based on the firm’s equity, in other words the value of its assets after subtracting the firm’s debt. This means that the tax in based on “running” the business rather than the actual value creation in the business. A company with a high equity faces a higher wealth tax burden than a company with a lower equity regardless of the profit (value creation) in the company. Theby Diamond and Mirrlees states that the only tax that should be used is the production-efficient. In other words, we should tax profits, consumption and so on, rather than wealth and other things that affect production decisions.

New businesses and start-up companies might have a high equity, but no income. The wealth tax is considered a tax on individuals as the owners of the companies are individuals.  In many new companies with positive equity and no income (hence no ability to pay dividends), the owners of the company may be forced to sell part of their shares to pay the wealth tax. This can be a discouragement for entrepreneurship.

The government is dependent on collecting taxes to fund education, health care, unemployment money and so forth. Taxes need to be designed in a way to incentivize value-creating behaviour. Regarding firms, the wealth tax seems to discourage job creation and innovation. On that note, dropping the wealth tax could have positive effects on the unemployment and value creating of the country.

This is the time when Norwegian politicians must pay attention to the design of the tax system. Over the last 3 years just over 48 000 jobs in the Norwegian oil sector has disappeared. Any tax burden that might lead to reduced investment in R&D and job creation should be removed. It is crucial to design a tax system that encourages innovation, entrepreneurship and job creation in the coming years.

Ingrid Knudsen Aas – 3105

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Author: studentnovasbe

Master student in Nova Sbe

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