Can't we trust the rich?

On Monday, a packed auditorium at the University of Oslo heard Finance Minister Jens Stoltenberg talk about how Economics has influenced Norwegian politics — in the management of oil, CO2 emissions and our pensions. Few love the economics profession as much as Stoltenberg. Nevertheless, he criticised the professionals' lack of understanding of politics and “the art of the possible.”

This election campaign shows a darker side of the economics profession's political blind zone: the tax system's long-term vulnerability to wealthy pressure groups.

In this year's election campaign, the country's richest are spending tens of millions of kroner on a campaign to end the Støre and the taxes that plague them. This is despite the fact that the research and examples business highlights, shows vanishingly few signs that the wealth tax makes it difficult to do business in Norway or that it disfavours Norwegian ownership.

The right wing, however, has allowed itself to direct. Frp will remove the entire wealth tax and increase corporation tax. It will be damaging for Norwegian business but a gift package for the country's richest. The other parties are even more foolish. They will remove the tax on shares, or “working capital”, as the spin doctors call it. The consequence will be that Norway's richest will avoid the wealth tax, while ordinary Norwegians with down-paid mortgages will have to keep paying.

theres some real problems with the wealth tax. But the real reason for the grudge against the wealth tax, is linked to the almost 5000 Billion in unrealized gains that the country's wealthiest would rather not have to tax. At the time of writing it is over 1500 billion crowns in latent tax liabilities that are in play.

The unrealised gains increase as a result of the exemption method, which allows capital to be moved from one business to another without having to pay dividend taxes. In theory, it will lead to more value creation and tax revenue.

What the Ministry of Finance did not take into account when designing the system is the policies of the rich. Namely, the tax they pay depends on the tax rate in which the dividends are taken. It provides an incentive to wait for lower rates and not least to influence them.

Like the economists Ole-Andreas Næss and Magne Mogstad has pointed out, it is “hardly healthy for democracy that someone has a tax bill of over 1000 billion waiting somewhere in the future.” Their willingness to pay to avoid this tax is 1,000 billion, the two economists write in Today's Business.

The Switzerland exodus is an example of the rich people being willing to go to great lengths to avoid taxes. In 2022, Bjørn Dæhlie, Kjell Inge Røkke and other wealthy people took advantage of a loophole in the tax law. If they stay in Switzerland until 2027, Norway will miss out $50 billion in tax revenue. What the expatriates would pay in wealth tax is pennies by comparison.

The fight against the wealth tax this year, can be interpreted as the rich starting to have a bad time. The wealth tax bites every year and eats away at the wealth that accumulates in companies, no matter how much tax planning one tries to do. If the wealth tax were to disappear, the rich people will have a better time waiting for the day their sympathisers sit in power and reduce, or remove, the dividend tax.

If politicians were to remove the dividend tax again — if only for one year — the country's richest could avoid more than £1000 billion in taxes. Such an opportunity is worth waiting for. This is the tax system's greatest vulnerability and financial management's biggest political problem.

How can society counter this democratic threat? One answer is to make the tax system more robust to the policies of the rich in particular and shifting political winds in general. It cannot be the case that a short period of low or no dividend tax should make it possible to escape the tax.

A good answer to this is broad tax settlements that bind the parties to a predictable tax policy over a longer period of time, as Stoltenberg has invited and leading voices in the Conservative Party allow for. But even broad settlements can lead to tax systems that do not take sufficient account of the time horizon of the rich.

In an interview with Magnus Marsdal suggests the aforementioned Næss a creative solution to that problem. If the tax is made sensitive to the tax rate at the time it is generated, rather than at the time it is triggered, it removes the incentive to wait to pay tax.

Whether it's the right medicine, I don't know. But clearly it should not be possible to pay taxes on unrealized gains at a tax rate that only lasts for a short period of time.

‍