Should Australia impose a wealth tax, as Oxfam suggests?

Short answer: no

Should Australia adopt a wealth tax? Perhaps a one-off tax of 5% on individuals’ wealth, as California has considered doing? Well, Oxfam has recently suggested that we should. The ABC and the Guardian seemingly reiterated these calls in interestingly uncritical coverage.

So, is a wealth tax a good idea? The short answer is no. It is a very bad idea and will cost Australia in the long run.

Let’s look at recent precedent. California has mooted introducing a wealth tax. This would come in a union-backed ballot proposal that would go to the vote in November. The current proposal is a one-off 5% impost. California Governor, Gavin Newsom, who is hardly a conservative, has objected to the proposal.

What happened in California? Well, the wealth tax has not even passed and billionaires are moving. Reportedly, up to $1 trillion in wealth has left the state. And this before the proposal even became law.

So what exactly happened?

Think of it this way. Suppose you want to paint your house. The going rate is $5,000. But, you only offer $3,000. The painter will take his/her labor and go elsewhere. This is the incentive compatibility constraint in action: you must at least beat the next best offer to keep the painter.

The analogy applies equally to capital. Suppose someone has assets. They can choose to live in California. Perhaps they like the weather or their family is there. So, they would prefer to stay. But, Texas, Florida, and Wyoming offer better deals. The weather is not quite as nice, but they have no state taxes and certainly no wealth tax. After a point, the cost of California’s taxes gets so high that people move. Again, it is the incentive compatibility constraint: if you want capital in your location, you must compete with the next best after tax return.

These departures have major financial impacts: This comes from income tax foregone, reduced capital availability and growth, reduced business formation, and lower job creation.

In Australia, the top 1% of all tax payers account for nearly 20% of all tax revenue. The top 10% of tax payers account for around 46% of all tax revenue. If you lose your wealthy people, you lose your tax revenue. This goes doubly if those people ran corporations. After the person moves, they will logically be more likely to create jobs in their new domicile. This is partly out of geographic salience and partly out of caution about their old home.

And, so we can see precisely what would happen in Australia.

The wealthier a person, the more mobile they are. Their income does not depend on them being in a specific location and seeing specific clients in person. Furthermore, while many ‘wealthy’ people rely on property for their wealth, the wealthier a person is, the more diversified they usually are. Some might say “good riddance”. But, then, one would also say “good riddance” to your tax revenue.

If Australia introduces such a wealth tax, people will weigh whether Australia’s weather really is good enough to justify the higher government charges. Or, perhaps they could just move three hours away to Auckland, which has no capital gains tax, let alone a wealth tax. Same with Hong Kong, Singapore and the UAE.

But, couldn’t Australia then just make the tax a one off? Well, this is the approach in California, and people are still moving to greener pastures. But, let’s face it, once the precedent is set, no one will believe that the tax is a simple one off.

How about imposing an exit tax or stopping people from leaving? Australia could try this. Of course, a reasonable prediction is that people would leave before the exit tax commences. This is because an exit tax is more pernicious than a wealth tax. So, if a wealth tax precipitates departures, so would an exit tax. But, worse, it would deter people from moving to Australia. This would then deprive Australia of capital, which would harm growth and tax.

The discussion in relation to wealth taxes exposes an inherent problem with Australia’s political discourse. It has become fashionable to play up “principal-principal”. High net worth individuals already pay the lion’s share of tax revenue. As indicated, the top 10% of tax payers accounted for around 46% of tax revenue. But, voting rights do not correlate with tax paid. This creates a myopic incentive to expropriate wealth.

A wealth tax will trigger human and financial capital to leave. It’s not the 1900s anymore. Thereafter, growth will fall due to reduced capital availability and the departure of precisely the type of business-creators you would want to retain. And, with lower growth you get less tax revenue, less productivity, and fewer jobs. At a time when we need to grow the tax base, a wealth tax would shrink it.

The government would be better served trying to grow the economic pie rather than trying to seize a larger slice of a pie, which it then causes to shrink.