Monday, 19 August 2013

The Norwegian Parliamentary Election 2013: The Distorted Wealth Tax Debate

The 2013 parliamentary election in Norway will be held on 9 September 2013. With that date approaching, I have observed with interest that one of (many) key issues discussed is the wealth tax. The debate goes something like this: The conservatives in general argue that this tax hurts business owners (less money to reinvest in their businesses) and in some cases the tax outright destroys businesses (e.g. the tax might be payable even when the business generates losses). The more socialist parties argue on the other hand that the effect of the wealth tax does not hurt business owners as much as the conservatives argue and that removing it would instead give the rich even more money and the "velferdssamfunnet", the welfare state, less. Both parties refer to research supporting their view and in some cases they refer to the same research, but interpret it differently (as has been the case this past week - here). A classic nonsense political debate perhaps.

The wealth tax in Norway is currently set at 0.7% of any private wealth exceeding NOK 870,000 (ca. USD 147,000). In comparison, the average salary in Norway is around NOK 475,200 (ca. USD 80,300). Assets employed in a business is classified as wealth. It can therefore be little doubt that the wealth tax can amount to a substantial sum for some. Any reduction in wealth caused by this tax means that the business owners are worse off financially than they otherwise would have been. On this there can be nothing to argue.

What the owners would use the additional money on if the wealth tax was removed would naturally depend on both individual circumstances and that of the business. Broadly speaking, the extra cash could be applied in the following ways: invest it in the business (hire another employee, higher salaries to retain and motivate staff, new tools, reduce dividends etc), use it for private consumption or investment, reduce the owner's private and/or business debt, or increase savings. But here's the thing: any one of these actions and any combination would benefit not only the owner, but society as a whole! Society would benefit even if the owner did not reinvest any of the additional money in the business! If removing the wealth tax benefits that particular business directly as a result is therefore largely irrelevant in the big scheme of things. The point is that the private sector in Norway needs the cash much more than the government (e.g. see here) and that the private sector knows much better how to put those money to work.

The debate should really be about whether overall taxes (direct and indirect) in Norway should be higher or lower or whether the government should be smaller or not. From a political perspective, it's a philosophical one. From an economics perspective, the Norwegian government needs to shrink. Period. As the overall tax burden in Norway is already very high even as the country is one of the richest in the world (due to oil and gas reserves), as government spending is bloated at best and as the country scores poorly on the latest index of economic freedom, the conservatives should not hesitate to say so. Removing the wealth tax is but one small step in the right direction towards lower taxes, a smaller government and a bigger and more prosperous private sector.

Unfortunately, as is the case in most western countries, the majority of conservatives in Norway are also pro big government and the welfare state. For example, Høyre, the Conservative Party of Norway and likely to win the election by the looks of it, in their alternative government budget for 2013 proposes to reduce government spending ("reduserte offentlige utgifter, bokført", page 7 and 95) by only NOK 11.4 billion, a reduction of only 1.1%! That can hardly be called conservative, by any standard, given the tremendous growth in government spending the Norwegian Labour Party has been responsible for in recent years (see chart below). The strong socialistic features of Norwegian politics and society are not about to change any time soon, no matter who wins. The big questions are not debated.

The upcoming election is therefore largely a non-event. To the detriment of innovation, industry and the private sector as a whole. In the end, when the oil and gas wells are empty and the fortune generated from oil and gas have been largely wasted (see here as well as the charts below), all Norwegians lose. The private sector as well as the public sector. And the Norwegians will blame it on the politicians they and their ancestors voted for. Ironic isn't it.

For more on the Norwegian economy and politics, go here and here

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