Taxing wealth Student introduction April 9th 2010 Andreas Tveitereid

Finansdepartementet Taxing wealth – main topics International trends Basic economic arguments Current Norwegian rules Recent amendments in Norway Equality, fairness and politics

Finansdepartementet International trends Norway, Canada, France, Luxembourg and Switzerland issue wealth tax in the OECD Several countries have abolished the wealth tax in recent years – among others Spain and Sweden The wealth tax is normally associated with generous basic allowance The wealth tax must be seen in relation to the property tax  In Norway, the combined tax on property and wealth is 2 pct.  OECD average is 5,5 pct  US and Canada have ~10 pct. on properties

Finansdepartementet Basic economic arguments PRO  Wealth is just as suitable as taxbase as income  Nice distributional effects  Fills a fiscal need  Additional tax on capital income  Tax on gently taxed items (property – profit not taxed)  Tax on profit can contribute to ineffective capital lock-in effects - the wealth tax counteracts this  Residential tax – must move to avoid the tax  Based on net wealth - property tax on gross value CONTRA  Difficult to value all wealth objects at market value creates distortions  Weakens access to capital for small firms, specially in a non-efficient capital market (retained earnings)  Differs between nationality – different demand for return on capital after tax – can result in capital owners moving abroad  Does not depend on income, require cash-flow. Political demand for exceptions (pensioners in large villas)

Finansdepartementet Current wealth tax rules (Norway) Tax rate 1,1 pct. of net taxable wealth (individuals)  Local government 0,7 pct.  Central government 0,4 pct.  Basic allowance NOK No wealth tax for the business sector (a few exceptions) Estimated government take 12,8 billion NOK in 2010 (1,5 pct. of total) Main weakness: undervaluation of property  Consequence: the tax system contributes to overinvestment in property

Finansdepartementet Recent wealth tax amendments Stocks valued at market prices (up from 65 pct.) Considerably increased basic allowance (almost fivefold) Removed “80-per cent” rule Commercial property values based on rent/market value Private property (homes) values based on estimated market value

Finansdepartementet Wealth tax amendment – illustration Large apartment Frogner/Oslo (1916) Large apartment Frogner/Oslo (1916  Price 17,5 mill. NOK  Taxable value NOK (3,7 pct.)  284 sqm, new taxable value 3,5 mill. NOK (20 pct.) Basic house Rjukan (1976)  Price NOK  Taxable value NOK (51 pct.)  148 sqm, new taxable value NOK (25 pct.) 2 bedroom flat Grorud/Oslo (1955)  Price NOK  Taxable value (9,5 pst)  64 sqm, new taxable value NOK (24,5 pct.)

Finansdepartementet Equality, fairness and politics

Finansdepartementet Summary and conclusion Few OECD countries issue a tax wealth Uniform valuation principles essential Wealth tax is an effective redistribution tool Still room for improvement in the Norwegian system  Property is undervalued compared to market price  Vacation properties are not valued based on market value Politically challenging to tax wealth in the form of property

Finansdepartementet THANK YOU FOR YOUR ATTENTION!