The other wealth tax

Posted by – August 19, 2011

Finland had a wealth tax from 1920 until its repeal in 2006. The marginal rate was 0.8% for individuals and 1.0% for corporations – the tax only kicked in for wealth over a certain limit, which was 250,000 € at the time the tax was repealed.

Taxes of this type are quite rare currently. In Europe, France, Switzerland, Liechtenstein, The Netherlands and Norway have wealth taxes. In each case there are a large number of exemptions that I assume make it possible for savvy individuals to mostly avoid paying. The French “solidarity tax on wealth” exempts owning businesses, old art, intellectual property, forestry holdings (why?), anonymous bonds (I don’t know what this is), pension plans and wealth derived from compensation for injuries. The Dutch exempt approved “green” investments (heh), which also receive an extra tax bonus on the income derived.

Finland, like most countries, does still have a capital gains tax. Under the current monetary system, this also acts as a wealth tax: there is always inflation, so even if a property doesn’t appreciate in real terms, it does appreciate in nominal terms, and so is subject to capital gains tax. Two natural questions arise: how much is this wealth tax, and how much do you actually need to profit from capital in order to keep its value constant?

For property that has an unchanged value, its nominal value theoretically increases at the rate of inflation. The tax due will be the tax rate multiplied by this increase – for the Finnish budget of 2012, the capital gains tax for incomes under 50,000 € is 30%, and inflation over the summer months has been about 4% annualized. So the effective wealth tax is 1.2% – higher than the old wealth tax! (For incomes in excess of 50,000€ the figure is 1.28%). So the repeal of the wealth tax actually represented a repeal of less than half of the wealth tax – in fact, very much less, considering that the wealth tax kicked in at 250,000 € whereas the other wealth tax has no lower bound.

And for the second question, we solve the equation (1-T)*P = I, where T is the capital gains tax, P is the rate of profit and I is inflation. This gives P = I/(1-T). For the Finnish figures, this gives 5.7% for lower incomes and 5.9% for higher incomes. So if you’re making less than that on your investments, you are actually losing ground, and the present value of your wealth is greater than the future value. So if spending is a source of happiness to you, you should spend as much as you can right now, because you’ll actually be able to consume less in the future.

0 Comments on The other wealth tax

Respond | Trackback