Proposed ‘wealth tax’ has a wealth of problems

Hawaii lawmakers are once again considering a wealth tax proposal, SB925 SD1, that would impose a 1% tax on taxpayers with assets in Hawaii exceeding $20 million.[1]

Proponents of the proposal, which also made an appearance in last year’s Legislature, contend that such a tax would improve the economy, reduce inequality and fund infrastructure spending.

But there are excellent reasons to be skeptical.

>> Wealth is hard to define. An individual’s wealth, unlike income, comprises a variety of difficult-to-value assets such as privately held businesses, private investments, real estate, works of art and intellectual property such as patents or trademarks.

SB925 would assign the state Department of Taxation to calculate the values of these assets, but how exactly would they do that?

Private investments, for example, are complicated to value because they are not public information and may be illiquid or structured in private equity funds, hedge funds, angel investments or venture capital investments.

Similarly, private businesses and their financial records are not publicly available. They also usually do not have an observable market value since their shares are not traded on public exchanges.

Same with works of art, collectibles, patents, trademarks and other things — including, sometimes, land or houses — that are basically “priceless” until actually exchanged in voluntary market transactions.

>> A wealth tax would be hard to administer. Difficulty in administering a “wealth tax” is the primary reason there are only three European countries with wealth taxes today, down from 12 in 1990.[2]

In France, 42,000 millionaires fled the country between 2000 and 2012 before its wealth tax was repealed in 2018.[3] A 2007 analysis by French economist Eric Pichet concluded: “[France’s] wealth tax impoverishes France, shifting the tax burden from wealthy taxpayers leaving the country onto other taxpayers.”[4]

Revenue collected from the tax also turned out to be an issue. For example, in Sweden, which abolished its wealth tax in 2007, revenues from the tax were lackluster and never exceeded 0.4% of GDP.[5]

A 2018 report by the Organization for Economic Cooperation and Development pointed out that net revenues from wealth taxes decreased over time, even while wealth accumulation had increased on average across the countries that had wealth taxes.[6]

The exact number of taxpayers in Hawaii who would be subject to the wealth tax, if SB925 were enacted, is not known. But it is highly unlikely that any taxpayers identified as owning assets worth $20 million or more would be afraid to move themselves or their assets to more tax-friendly states. This, of course, would have the effect of reducing the Hawaii’s tax base subject to the new tax law.

For the wealthy taxpayers who might remain, regulators would require a considerable amount of resources to evaluate their assets and deal with the challenges that would invariably arise when taxpayers dispute the valuations assigned to their assets.

>> A wealth tax would stunt economic growth. In a recent Honolulu Civil Beat article, state Sen. Karl Rhoads, who introduced SB925 in January with state Sen. Stanley Chang, claimed that “the economy does better with the wealth spread out more.”[7] But that isn’t necessarily what a wealth tax will achieve.

For example, most wealthy individuals are entrepreneurs, which suggests that they use their assets to invest in productive avenues that ultimately bolster firms and workers.

Nationwide, approximately 50% of households in the top 5% of wealth distribution and more than 60% of households in the top 1% of wealth distribution are entrepreneurs, according to estimates from Federal Reserve economists Marco Canetti and Mariacristina De Nardi.[8]

In 2006, Canetti and Denardi also found that about 30% of self-employed business owners used personal assets as collateral to finance their businesses.[9]

If the wealthy rely on their wealth to invest and pursue productive economic ventures, then a wealth tax would tend to reduce the pool of available capital that entrepreneurs and businesses rely on for production and expansion. This ultimately would discourage entrepreneurial activity, slow job creation and depress economic growth.

In 2012, Yale University economist Marnix Amand found that a wealth tax hurts economic output because it makes it difficult for entrepreneurs to invest in their firms.[10] As a result, Amand concluded that “1.2% wealth tax diminished output by 1.5% by reducing the number of entrepreneurs by 1.9% and their output by 6.7%.”[11]

Similar research by economists David Evans and Bryan Jovanovic found that constraints on wealth accumulation and liquidity greatly influence the decision to start a business in the first place, because capital is vital to get a business off the ground.[12]

In testimony on Feb. 2 before Hawaii’s Senate Committee on the Judiciary, Joe Kent of the Grassroot Institute of Hawaii said Hawaii’s top 1% of income earners already pay about a quarter of all income taxes in the state.[13]

He said imposing a wealth tax could also exacerbate Hawaii’s population decline, which has been going on for six years in a row, leaving behind a smaller taxpayer base.[14]

Taken altogether, the data suggests that a wealth tax is effectively a tax on entrepreneurship, job growth and economic prosperity — which is to say, Hawaii would be better off without a “wealth tax.”

[1] “SB925: Relating to a wealth asset tax,” Hawaii State Legislature, Jan. 20, 2023.

[2] Chris Edwards, “Why Europe Axed Its Wealth Taxes,” Cato Institute, March 27, 2019.

[3] “Rising number of wealthy French fleeing abroad,” France 24, Aug. 8, 2015.

[4] Eric Pichet, The economic consequences of the French wealth tax,” Bordeaux Business School, April 5, 2007.

[5] Magnus Henrekson and Gunnar Du Rietz, “The Rise and Fall of Swedish Wealth Taxation,” Nordic Tax Journal, May 2014.

[6] “The Role and Design of Net Wealth Taxes in the OECD,” Organization for Economic Cooperation and Development, 2018, p. 20.

[7] Kevin Dayton, “A ‘Wealth Asset Tax’ On Hawaii’s Richest Residents Advances In The Legislature,” Honolulu Civil Beat, Feb. 2, 2023.

[8] Marco Cagetti and Mariacristina De Nardi, “Taxation, Entrepreneurship, and Wealth,” Social Science Research Network, September 2006, p. 5.

[9] Marco Cagetti and Mariacristina De Nardi, “Entrepreneurship, Frictions, and Wealth,” National Bureau of Economic Research, 2006, p. 842.

[10] Marnix Amand, “Wealth Taxation and Entrepreneurship,” Social Science Research Network, Oct. 31, 2012.

[11] Ibid.

[12] David S. Evans and Bryan Jovanovic, “An Estimated Model of Entrepreneurial Choice under Liquidity Constraints,” Journal of Political Economy, August 1989, p. 808.

[13] Joe Kent, Testimony: Re: SB925 — Relating to a wealth asset tax,” Grassroot Institute of Hawaii, Feb. 2, 2023.

[14] Ibid.

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