As part of the National Revenue Strategy for 2024-2030, the Ukrainian government is considering various tax reforms, including tax increases for certain categories of taxpayers.
Among other things, there are ongoing discussions on the sidelines about the possibility of introducing a wealth tax, following the example of certain European countries. Some experts believe that such a tax could reduce inequality and increase budget revenues. However, taxation is a very delicate matter. In the pursuit of filling the state budget, it is possible to break the law. Among other things, the introduction of a wealth tax requires an effective system of administration and control. Ukraine may face challenges in assessing assets and preventing tax evasion.
Paradoxically, increasing taxes may reduce tax revenues. After all, high taxes can reduce incentives to work and invest, leading to lower overall income. A high tax burden can encourage more people to evade taxes. Excessive taxation can lead to economic inefficiency, reducing overall economic activity.
To model optimal taxation schemes, the so-called Laffer curve is used to show the relationship between tax levels and tax revenue. It illustrates that there is an optimal level of taxation that maximises tax revenues. If taxation is too high or too low, tax revenues may decline.
If you chase more, you will lose the latter
In this sense, the customs precedent that has taken place in recent years in Norway, a country that ranks among the top countries in the world in terms of living standards, is illustrative. In 2021, the Norwegian government, led by the labour coalition, decided to raise the wealth tax. This tax, also known as the luxury tax or the tax on unrealised gains, was raised to 1.1%. This was part of the budget plan for 2022.
This tax increase was expected to bring in an additional $146 million a year to the budget. The wealth tax in Norway applies to those who have unrealised assets: real estate, shares and other investments. According to the authorities, this tax is aimed at reducing inequality and supporting social justice. However, in practice, the results of this tax increase were less impressive than expected. This was due to various factors, primarily economic instability and lack of effective implementation of tax policy.
In addition, the dividend tax was increased by about 20%, which exacerbates the effect, as wealth taxes often have to be financed by withdrawing dividends. The result of this socio-economic experiment was that more than 30 Norwegian billionaires and multimillionaires left Norway in 2022. This is more than the total number of super-rich people who left the country in the previous 13 years.
This resulted in a decrease in tax revenues at the old tax rate of more than $448 million, and by $594 million at the new 1.1% rate. More ultra-rich people are expected to leave this year due to the wealth tax hike in November, costing the state tens of millions in lost tax revenue.
Many wealthy Norwegians, including billionaire Kjell Inge Røkke, have moved to Switzerland because of lower taxes. He is estimated to be worth NOK 19.6 billion (£1.5 billion) and his move will cost Norway NOK 175 million in annual tax revenue. Last year, he was the largest taxpayer in Norway, having paid around NOK 1.5bn since 2008. His move to Switzerland was the result of higher wealth taxes in Norway, which include a 0.7% municipal tax and a 0.4% state tax on large assets.
Those who have left have a combined wealth of at least NOK 600 billion. The flow of entrepreneurs leaving the country has come as a shock. Some politicians blame the rich for leaving, but many citizens do not like losing investors.
Tord Ueland Kolstad, an investor with assets worth NOK 1.5 billion, also moved to Switzerland because of the tax hike. He noted that due to the new tax rules, he would have to pay himself dividends to cover the wealth tax, which is not conducive to job creation.
Erlend Grimstad, State Secretary at the Ministry of Finance, hopes that wealthy Norwegians will return. He noted that Norwegian success is based on a strong welfare system and education, and wealthy citizens should contribute by paying more taxes according to their means.
Norwegian entrepreneurs’ class action lawsuit against the state
As a result, Norway lost several billion kroner in tax revenues due to the wealth tax, which had a negative impact on infrastructure and small and medium-sized enterprises. There is an important nuance: the tax is calculated based on the value of a company’s assets, not its profits, and applies only to Norwegian businessmen, which creates an inequality with foreign investors. This has led to a depletion of Norwegian companies’ capital, forcing them to reduce investment or close down.
Currently, four entrepreneurs have commissioned a study on the wealth tax for a class action lawsuit against the state. The study compares the approach to the wealth tax in different countries of the Organisation for Economic Co-operation and Development: those that have the tax, those that have abolished it, and those that are considering its introduction. It does not include a legal assessment under international treaties or the Norwegian constitution, but aims to prepare the ground for a class action lawsuit in a Norwegian court.
Political benefit of the Norwegian government from the emigration of ‘traitors to the country’
The Norwegian government reacted to the departure of businessmen by increasing the exit tax and criticising migrants for breaking the social contract. This has raised questions about the government itself, but there are no plans to abolish the wealth tax or stop its increase.
There are probably two reasons for the government’s tough stance. First, the executive branch in Norway is powerful, but trust in it is declining. Professors are criticising the government, and discontent is growing in the private sector. Second, the government is not concerned about the crisis because of the country’s oil and gas wealth, which acts as an insurance policy. This allows the government to avoid being held accountable for its mistakes in the short term. Some suspect that the government is trying to gain political advantage by discrediting emigrants as ‘traitors to the country’.
Comparison of OECD countries
Comparative jurisprudence is the analysis of legal systems by comparing similarities and differences, including the influence of foreign law on domestic law. It is particularly developed in Germany, Austria, France, the UK, the US and Switzerland, but is also relevant to Norway. OECD countries are comparable in their approaches to tax systems, so they can export their legal decisions. This can be done through judicial interpretation or the adoption of laws.
Scandinavian supreme courts often refer to foreign court decisions. The Supreme Court of Norway uses such references, especially in matters involving other countries.
Wealth tax should not destroy the assets of the owners
Among the countries with a wealth tax, Switzerland is particularly interesting, as it has become an economic haven for Norwegian wealthy individuals driven from their homeland by tax pressure. It has a tax at the cantonal and municipal levels and attracts Norwegian emigrants. Wealthy foreigners may be taxed according to their expenses if they do not have paid employment. Switzerland’s attractiveness for investment is explained by the absence of capital gains tax, low wealth tax rates and competition between cantons. The Swiss Supreme Court has ruled that confiscatory taxation is unconstitutional, guaranteeing property rights and prohibiting taxes that destroy or make it impossible to create new assets. Wealth taxes should not force the expenditure of assets to pay them.
The provision that wealth taxes should not destroy assets can be found in the laws of Germany, France, Austria and Latin America. It is also the basis of the case law of the European Court of Human Rights. Germany, France and Sweden have abolished wealth taxes because of their harmful effects on the economy. Rich people emigrated, and this undermined the government’s revenue base. Wealth tax discourages investment and company growth, which reduces other important tax revenues, such as corporate income tax.
Former French Prime Minister and presidential candidate Edouard Philippe said: ‘If you want the rich to pay taxes, don’t make them leave. The ISF has led to rich people leaving France. Tax justice is about the rich staying and paying taxes here.’
Interestingly, in some countries that have abolished wealth tax and in those that never had it, left-wing politicians regularly propose its reintroduction. Do you think a wealth tax would be effective in Ukraine?
Tetyana Morarash
