Trade and wealth tax myth-busting

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Facts are useful. They allow you to make decisions based on how they will affect the world around you. Myths are useful too. They allow people to make sense of things that would otherwise seem chaotic. This means they can be used to persuade people to support something that may not have the effects they expect. That is what happens when myth is confused for fact. So, today, I engage in some myth-busting, in two areas: EU-US trade relations for starters, and the UK debate on wealth taxation for the main course. Send your favourite economic policy myths and facts to [email protected].

Donald Trump has sent an angry letter to European Commission president Ursula von der Leyen. In it, the US president repeats his rant about how unfair and unbalanced the trading relationship is and vows to slam huge additional tariffs on European imports.

So here is a quiz question for readers: try to answer without checking. How big is the Eurozone’s bilateral current account surplus with the US? €100bn? €200bn? Maybe €500bn?!

It’s almost a trick question. In 2024, the Eurozone’s current account surplus with the US was . . . €3bn, as the European Central Bank showed in a recent data release. Surprised? So was I, because the large external surplus of the monetary union (and the EU as a whole, without the UK) has been a basic feature of the global economy since the aftermath of the global financial crisis. And complaining about the European surplus vis-à-vis the US is a mainstay of Trump’s grievance politics.

The story is, admittedly, complicated. If you look only at goods, the Eurozone has a large bilateral surplus: €253bn in the first quarter of this year. And that, of course, is the only thing Trump cares about. But services are traded too, and there the Eurozone has had a growing deficit since 2020 (it reached €172bn in the first quarter). A large part of that has to do with intellectual property payments to US tech companies, presumably for services ranging from videoconferencing in the pandemic to “artificial intelligence” large language models today. In addition, the current account surplus is reduced (through its “primary income” component) by the large profits these companies are repatriating to the US.

And it’s even more complicated than that. Both the exports and the imports seem to involve goods produced and services ultimately sold outside of the Eurozone by US companies’ subsidiaries in Ireland, which suggests some of the trade (im)balance data is an artefact of US corporate tax manoeuvres. The European Central Bank has an entire research note on this for those wanting the details. Suffice it to say here that it’s not just President Trump who may be carrying an overly simple image of the economy in his head.

Now on to the UK, where chancellor Rachel Reeves has tried to make a splash about financial regulation, though my bet is that the debate will keep focusing on taxes and spending until her Autumn Budget (and beyond). In my FT column this week, I argued that both the economy and Labour’s political fortunes would benefit if the government pursued comprehensive tax reform instead of tinkering at the edges. I noted that it was . . . 

 . . . in this context of comprehensive [tax reform that] Labour could properly consider a wealth tax, preferably on the Swiss or Norwegian models of an annual levy on net assets that replaces inheritance tax or capital gains tax.

As the debate on wealth taxes has reappeared — many Labour MPs want a version of them, and the government is no longer clearly ruling them out — so have the many misgivings that are usually rolled out. Some of these, however, qualify as myths. Below, I try to put four of them to bed, at least for the case of a wealth tax proper; that is, a recurrent annual levy on a taxpayer’s total assets net of debts.

“It is too hard to do.” The idea that implementing a net wealth tax is particularly challenging in terms of logistics and governance keeps coming up. Of course, it could be that the UK tax administration is particularly useless (the FT reports that MPs have accused the government of not knowing how much tax billionaires pay). It could also be that the complainers have not bothered to look at how net wealth taxes are implemented in the countries that have them. Switzerland and Norway have two of the world’s richest, most successful and best-governed economies. They both levy net wealth taxes and have been doing so for a very long time. While such a tax may sometimes be politically contested, there is no sign at all that levying it is difficult in purely practical terms. In Norway, for example, property values are automatically assessed based on formulas, financial companies report bank and investment holdings to the tax authorities, and unlisted company stakes are taxed based on their reported accounting values.

“It will not raise enough money to be worth it.” But in these other countries, it does. Recurrent wealth taxes take in 1.5 per cent of GDP in Switzerland, and 5 to 6 per cent of total tax revenue. In Norway, the rates are about 0.6 and 1.5 per cent, respectively. If a wealth tax in the UK took in similar percentages, it could raise between £20bn and £45bn.

“It will scare the rich away.” It is true that Norway experienced an exodus of some very rich people after the tax increase was announced, but it is hard to pin it on the wealth tax since other capital taxes were increased at the same time. In particular, the government pre-announced (bad idea) that it would close a loophole that allowed people to escape capital gains tax on gains made in Norway by moving abroad for a short period. In any case, where did the multi-millionaires flee to? Switzerland! Switzerland admittedly allows foreign taxpayers special treatment when it comes to its wealth tax, so if the UK thinks it really cannot thrive without a lot of footloose foreign billionaires, it could copy the Swiss set-up. To the extent that the worry is about native entrepreneurs fleeing the home country — Norway’s issue — why not copy the US and tie a wealth tax to citizenship and residence rights, as well as actual residence?

“It will kill incentives to invest.” Even if they don’t flee, taxing “value creators”, so we are told, would make them save and invest less. That raises the question of what they would do with their money instead. Consume it (and add demand in the economy)? In any case, the little evidence there is does not show this to be a problem. Wealth taxation largely seems to affect reported wealth, not actual wealth — ie attempts to avoid or evade the tax. It also does not seem to hurt the liquidity of entrepreneurial companies much. Anecdotally, one successful entrepreneur once told me that when he was building his start-up, he couldn’t care less about how he was going to be taxed if he ever became a multi-millionaire, but that a lower income tax rate would have been of much more help back then than a lower wealth tax.

The bigger economic point here is that incentives to accumulate and deploy capital productively depend on the entirety of capital taxation (and indeed on non-capital taxation). A wealth tax allows a state to reduce other taxes instead, such as the corporate tax on profits. Norway has abolished the inheritance tax; Switzerland mostly doesn’t tax capital gains or inheritances. If anything, a net wealth tax rewards better (or luckier) entrepreneurs because you pay the same no matter how big the return on your pot of capital, whereas corporate or income taxes make you pay more the more successfully you invest. In this sense, a net wealth tax is a handmaiden of capitalism.

Share your thoughts on trade balances, wealth taxes and other economic facts or myths via [email protected].

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● Has Donald Trump won the first round of his trade war?

● New York’s business elite seems willing to consider the possibility that Zohran Mamdani is not the devil.