Won’t wealthy people just leave the country if we implement a wealth tax?

We believe that the majority of wealthy New Zealanders would like to live in a thriving and productive society where everybody has a fair go, and there’s more keeping them here than tax advantages.

Research shows that fears that wealthy people will leave if we tax wealth are overblown, and there are ways to design wealth taxes to mitigate this risk.

Where people have accumulated their wealth in New Zealand, using New Zealand infrastructure, human capital and resources, it is reasonable to expect that they contribute their fair share even if they choose to take their wealth offshore.

There is more tying people to New Zealand than their ability to minimise their tax obligations, like our environment, safety and security, culture, freedoms, personal and family connections, and whakapapa. That’s why almost 100 well-off New Zealanders have called on the government to tax wealth more, so that families can be lifted out of poverty, an “investment that would pay off many times over”.  Plus wealth is often held in immovable property that can’t be shifted offshow, like land and buildings.

Research in the UK has also found that 88% of millionaires would be happy to pay more tax, and that a majority of wealthy individuals would not choose to emigrate as a result of a wealth tax, due to a combination of factors including stigma and reputational risk, familial upheaval, administrative burden, and attachment to place. Conversely, we currently have a serious problem with skilled young people leaving the country, due in large part to the government’s failure to uphold the social contract by raising resources to invest in services and to arrest runaway inequality and housing costs.

There is mixed evidence internationally for wealth tax triggering residency changes or the movement of assets offshore (known as capital flight). For starters, in New Zealand quite a lot of wealth is held assets that can’t move, like land and buildings. Some evidence such as from a study of Denmark’s wealth tax suggests that wealthy people may alter their behaviour, including by reducing their overall wealth holdings (by consuming more and saving less) or by moving wealth offshore. Where wealthy people choose to consume more and save less, this can benefit the underlying productivity of the economy and serve to reduce wealth concentration. Where they choose to move wealth offshore, this primarily represents unproductive financial shuffling, which has little impact on economic productivity. While some may choose to change their residency and move all their business activities offshore, this would be a minority.

A well designed wealth tax, with robust, third-party data-driven enforcement and international cooperation can mitigate the risk of capital flight. There are levers available to policymakers which could address the issue of ‘expatriation’ or wealthy people leaving the country. For instance, government could levy an “exit tax”, or continue to levy a wealth tax for a defined period (for example 5 or 10 years) on persons who have emigrated. The US, Canada, France, Germany, Spain, the Netherlands and Australia all have some form of exit tax. Government could also reduce the threat of “tax competition” from other jurisdictions by continuing to levy the difference between tax paid in the new location and the tax rate that would be paid in New Zealand.