Norwegian entrepreneur Karl Alveng Munthe-Kaas will face a hefty tax bill when the grocery company he co-founded in 2013 goes public. But the 37-year-old isn’t bitter; he welcomes it.
For Munthe-Kaas, a system that raises revenue by targeting those with the greatest capacity to pay makes sense. “I think it’s a simple, and also fair, principle,” said Munthe-Kaas. No one in Norway would have become very wealthy, he said, “if it hadn’t been for the public services the government provides.”
Norway’s tax — levied on an individual or couple’s net wealth, above a threshold — is one of only a handful worldwide. But in the U.S., the once-fringe proposal is now getting mainstream attention.
The idea has been championed by high-profile progressive Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.), who argue the policy could be a powerful tool to narrow America’s sobering wealth gap, including the enduring racial divide. A tax on the small group of individuals and families who control disproportionate riches could generate much-needed revenue, wealth tax supporters argue, to fund services like health care, child care and education; to tackle pressing issues like climate change; or perhaps to fund a universal basic income. Even some American billionaires, who would be subject to a wealth tax, are in favor of the notion.
The Norwegian wealth tax presents a long-standing successful model, dating back to the late 19th century. Yet the idea is still a political lightning rod there. Critics contend that it could hurt asset-rich but cash-strapped mom-and-pop businesses by forcing them to drain resources to pay the tax and that it may harm job growth and deter aspiring entrepreneurs from launching new ventures.
“Most Norwegians understand that we get something in return for the taxes we pay.”
A new study of the Norwegian wealth tax, published by the German nonprofit IZA Institute of Labor Economics in October, suggests the concerns about hurting small businesses might be overblown — and offers insights for the U.S. and other countries as they shape tax policies of their own.
Researchers analyzed 10 years of data from Norwegian tax authorities on small and medium-sized firms majority-owned by individuals or couples (their business is considered personal wealth because they own it), studying more than 40,000 businesses for each year. They didn’t find that the owners drained their business resources to pay the wealth tax — in fact, the tax was even linked to a modest boost in hiring.
The 0.85% tax is triggered when an individual amasses 1.5 million Norwegian krone in personal net taxable wealth and double that for couples — roughly $165,000 and $330,000, respectively, in U.S. dollars.
Because businesses are assessed on a “book valuation,” which excludes the amount that owners pay in wages, the study found that business owners subject to higher wealth taxes tend to hire more employees to reduce their taxable wealth. The incentive to invest in their firms becomes stronger as their tax burden increases, explained Marie Bjørneby, a researcher from the Norwegian University of Life Sciences who co-authored the IZA study.
“The Norwegian study shows that wealthy Norwegians poured extra wealth into their businesses to shelter their wealth from the tax, hereby fueling the growth of their businesses,” said Emmanuel Saez, a University of California, Berkeley economist whose work helped inform Sen. Warren’s wealth tax plan. “It is a striking finding that experts had not anticipated,” Saez said.
Economists stress that an effective wealth tax comes down to how its rules are structured, administered and enforced. Norwegian citizens annually review preprepared tax data reported by third parties, like banks, which makes filing their taxes relatively easy and avoiding them relatively hard.
Cultural attitudes also play a role in compliance. “Most Norwegians understand that we get something in return for the taxes we pay,” said Munthe-Kaas. He pointed out the ways that government programs benefit his business: He doesn’t have to pay for employees’ health insurance, for instance, while the country’s universal education system creates a high-quality workforce.
In the U.S., wealth tax advocates are pushing the policy as a tool to address the legacies of systemic racism and to narrow the ballooning racial wealth divide. Median wealth among Black and Latino families has barely budged since the 1980s, while the 400 richest Americans possess more wealth than all Black households and a quarter of Latino households combined, according to research from the Institute for Policy Studies.
Although the small, democratic-socialist Norway is a very different beast from the U.S., the latter can still draw lessons from its experiment — specifically how the tax affects mom-and-pop business owners. Tax experts say the levy doesn’t harm Norway’s owners of small and medium businesses for a few key reasons, the most basic being that plenty of them don’t have enough personal wealth to owe anything under the tax. Only about 10% of the Norwegian population pays a tax on their wealth, according to Bjørneby.
The fact that the wealth tax looks at a company’s book value, rather than its market value, could make a difference for entrepreneurs starting new businesses. Critics argue that a wealth tax can “inhibit entrepreneurship because startup firms can have high market value before they start generating profit,” said Jarle Møen, a professor at the Norwegian School of Economics.
But most Norwegian businesses, like Munthe-Kaas’, have low book value in their early years even if the company is growing. So the extent of the effect on startups is disputed, said Møen. “In reality, it is only a potential problem for the most successful entrepreneurs when they go public,” he said.
“On some days, I find a wealth tax very appealing. But I cannot get past the administrative issues that would make it difficult.”
Regardless, a wealth tax would have to work differently in the U.S., where attitudes are more individualistic, wealth inequality is more extreme, and wealthy people are famously good at avoiding taxes.
Some experts believe the U.S. lacks the infrastructure to implement and fairly enforce a new tax system this different from the current system. “On some days, I find a wealth tax very appealing,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. “But I cannot get past the administrative issues that would make it difficult, and I’m not convinced that the solutions that some people have suggested are going to get around these problems.”
The proposed policies haven’t adequately accounted for the ways Americans could legally avoid or illegally evade the wealth tax, said Holtzblatt. She noted that the Internal Revenue Service has lost more than 20% of its funding since 2010 and already struggles to enforce the income tax. The recent New York Times investigation, which found that President Donald Trump paid $750 in income tax in 2016 and 2017 despite owning hundreds of millions of dollars in assets, is one striking example of how people with means can finagle the system to their advantage.
But the time might be right to usher in change. A January Reuters/Ipsos poll found that nearly two-thirds of Americans support a wealth tax, agreeing that “the very rich should contribute an extra share of their total wealth each year to support public programs.” While support was strongest among Democrats, a majority of Republicans also agreed. Especially as Americans focus on addressing racism and inequity amid growing support for the Black Lives Matter movement, momentum for a wealth tax — along with other economic interventions like reparations — could build.
The U.S. has an advantage, said Bjørneby, because it has the opportunity to learn from countries like Norway and craft a wealth tax to best suit its needs. “When you start with a blank sheet,” she said, “you have so many choices.”
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