[Smart Economics] Punitive Taxes, Fleeing People

Want to Gain Weight? Pay More Taxes

It is no exaggeration to say that taxes began with human civilization and have evolved alongside it. As civilization has developed, taxes have become more complex and diverse. Today in particular, most government revenue is financed by taxes. The reason citizens’ taxes can fund most of the national budget is presumably because those taxes are used for the people. Yet taxes that are meant to serve the public are sometimes used as a punitive tool. A representative example is the argument that taxes should be imposed on the rich to achieve income redistribution. In other words, a “wealth tax.”

Calls for a wealth tax have persisted over time, even though imposing taxes for a specific purpose, as with a wealth tax, can reduce taxation to a punitive instrument. And the targets of punitive taxation have not been limited to the rich. There have been other attempts to impose taxes on specific groups. At one point, even obesity became a target of taxation. Can obesity really be taxed?

Denmark’s Obesity Tax, Which Ended in Failure

In 2011, the Danish government introduced the world’s first obesity tax. At the time, 13% of Denmark’s population was obese and 47% was overweight. Believing that obesity could reduce productivity and strain public health insurance finances, the Danish government imposed a tax of about 3,400 won per kilogram of saturated fat contained in food products. Just before its introduction, the obesity tax was viewed positively because it was expected to improve public health while also raising additional tax revenue. But the result was disastrous. Prices of everyday items such as meat, butter, and milk subject to the obesity tax soared. Unable to bear it, Danish citizens headed to neighboring Germany to stock up on food. As the domestic market collapsed, related businesses went bankrupt, and it even created the serious social problem of falling employment. In the end, Denmark’s obesity tax was a complete failure and was abolished after just one year.

In promoting the obesity tax, the Danish government cited good intentions such as improving public health and stabilizing medical finances. But the obesity tax produced only inflationary pressure, higher administrative costs, weakened competitiveness in related industries, and increased inefficient taxation. The positive effects originally expected never materialized. In other words, the obesity tax caused greater dysfunction than benefit.

Today, most countries no longer have closed economic structures but open ones. In other words, borders no longer meaningfully constrain goods markets. If high taxes in one country make the price of goods abnormally expensive, consumers can simply buy the same goods in another country where prices are relatively cheaper. In a small country like Denmark, this shift in consumption through cross-border shopping appeared even more sharply and resulted in the worst possible outcome: a slump in the domestic market. That is why the Danish government had no choice but to quickly acknowledge the failure of the obesity tax and abolish it.

A Wealth Tax That Drains National Wealth

Countries discussing the introduction of a wealth tax are often facing severe fiscal crises. Politicians in particular often target the pockets of the wealthy as an easy way to make up for mistakes they themselves have made. This can be seen as a typical form of populism.

But punitive taxes such as a wealth tax more often harm society than help it. Most notably, they can drive sound domestic companies and talented people to other countries. For this reason, Sweden abolished its inheritance tax in 2005 and its wealth tax in 2006. In 1997, wealth taxes were ruled unconstitutional and abolished in the Netherlands and Germany. Even countries where socialist traditions remain, such as Russia and Eastern European states, are shifting policy away from progressive taxation and toward flat tax systems that impose the same tax rate on the rich.

More recently, another country went through a major ordeal because of a wealth tax: France. After taking power in 2012, the Hollande government aggressively implemented the wealth tax it had pledged during the presidential campaign, only to face social turmoil caused by unexpected “tax exile.” Wealthy individuals, outraged by the absurdly high wealth tax, left France and emigrated to other countries.

Bernard Arnault, chairman of the global luxury brand Louis Vuitton, applied for Belgian citizenship, where taxes were lower than in France, and Gérard Depardieu, one of France’s most famous actors, fled to Russia. The wealth tax thus came back like a boomerang in the form of enormous losses of national wealth.

As these cases show, excessive punitive taxation rarely achieves meaningful results, no matter what justification is offered. More often than not, it inflicts serious damage instead. In the end, the Hollande government’s wealth tax plan was ruled unconstitutional by the French Constitutional Court, forcing it to introduce a substantially scaled-down version of the original bill.

Excessive punitive taxation, as these cases demonstrate, not only fails to achieve its intended goals but often produces the opposite effect. This is why most countries avoid or abolish punitive taxes. Taxes therefore must be implemented universally, targeting the broad public within categories defined by reasonable standards.

▲ Please remember

Taxes are sometimes used as a punitive tool, and a representative example is the “wealth tax,” which seeks to achieve income redistribution by taxing the rich. But imposing punitive taxes not only makes it difficult to achieve the original objective, it often produces adverse effects instead. Taxes should be implemented universally for the broad public within categories defined by reasonable standards.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [스마트 경제 읽기] 징벌적 세금, 도망가는 사람들

Author: Sung-no Choi

Date: 2020-11-09

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=6&idx=23225