(Bloomberg) -- From London to Paris and New York City to Sacramento, debt-hit governments are scrambling to bolster their fragile balance sheets. Increasingly, they’re training their sights on the rich to help bail them out.   

Across swathes of the western world, political parties of varied stripes are homing in on wealth taxes as a neat fix to rising fiscal problems. They’re jacking up existing levies, planning new ones and contemplating exit taxes to halt the rising flow of departures to more fiscally attractive countries and states, hitting those on the way out with a big bill if they leave.  

Accelerating wealth tax proposals are seen by their advocates as a much needed measure to combat widening inequality with government services under strain. But the simple truth is that they’re often tough to make work, ineffective, time consuming — or all three. The mobile rich can relocate more easily now than ever. Plus the sums that wealth taxes actually raise often undershoot projections, and they’re often seen as deterring investment. 

“Both sides overestimate what either introducing a wealth tax will do or abolishing a wealth tax will do,” said Nick O’Donovan, a senior lecturer at Keele Business School who worked on Britain’s Wealth Tax Commission in 2020. 

Generally speaking, such taxes are one of three main ways in which governments raise revenue from citizens — alongside income and consumption. The calculation at a broad level is to value an individual’s possessions such as stocks, secondary properties and art, subtract any debts and then put a recurring levy on the value left over. What makes net wealth taxes different from other asset-based levies, such as inheritance or land taxes, is their usual repeat nature, focus across different asset classes and requirement for liquidity. 

Just a handful of European countries — including Spain, Norway and Switzerland — levy net wealth taxes and their numbers have been dwindling over recent years. (Some other nations like the Netherlands have taxes in place which the OECD says function in practice like a wealth tax). For those countries that retain them, they can be an administrative headache, involving case-by-case assessments of sometimes hard-to-value or illiquid assets such as art or private businesses. Some have decided it’s simply not worth the effort.

Norway illustrates some of the pitfalls. The Nordic nation imposes a 1% tax on net wealth above about 1.9 million kroner ($188,000) and 1.1% above 21.5 million kroner. While that doesn’t sound like an awful lot in percentage terms, the country has seen a surge in high-profile departures after recent increases. In September, the nation’s election was electrified by a populist party’s promise to scrap the country’s wealth tax. 

UK Chancellor Reeves is aware of how quickly the wealthy can exit if the fiscal landscape shifts. The country recently abandoned a two-century old tax break for non-domiciled residents, prompting high-profile departures to the likes of Monaco and Dubai. She still raised taxes by £26.1 billion in November, including freezing income-tax thresholds in a move that disproportionately hit higher earners and jacked up taxes on more valuable homes.

The migration to lower-tax jurisdictions in Europe is mirrored in the US, where cities such as Miami have gained from high-net-worth individuals and companies relocating from New York. Texas, like Florida, offers zero state income tax and has also proved an attractive relocation spot. A recent report found a net 30,000 New Yorkers quit the city for Palm Beach and Miami-Dade counties in Florida in the five years through 2022, taking with them a combined $9.2 billion in income. Elon Musk, Goldman Sachs, Chevron and hundreds of other companies have also relocated business to Texas, bringing employees with them.

In Europe, wealth taxes have exposed divisions in political parties ranging from Britain’s ruling Labour Party to Emmanuel Macron’s Renaissance Party. In the Netherlands, they’ve pitted the nation’s courts against the government. Nicolas Dufourcq, head of one of France’s state-backed investment banks, recently described wealth taxes as “communist,” while billionaire Bernard Arnault said they’re a “pseudo-academic” plot that would destroy the economy.

When it comes to rising inequality at least, wealth tax advocates have a point. Research shows that the very well-off often enjoy lower effective tax rates, even as the gap between rich and poor is rising. In countries from France to the Netherlands, billionaires typically pay lower effective tax rates than high earners. In the US, the top 10% of households own over two-thirds of the nation’s total wealth, according to Inequality.org. 

The administrative drawbacks of wealth taxes are apparent in the Netherlands, where levies kick in on an individual’s assets above about 59,000 euros ($68,000). The tax has been the cause of great controversy in recent years because it’s levied on the basis that investments generate a positive return, even in a down year for investors’ portfolios. Authorities are now grappling with the prospect of having to reimburse tax payers for having paid too much.

In Switzerland, wealth taxes are levied at the cantonal level to fund local government services. They’re seen as part of a stable-yet-flexible system that has attracted the global rich, with rates ranging from about 0.1% to 0.88%, according to HSBC. 

Spain’s wealth tax is imposed on assets worth more than €700,000, although main residences are exempted, with rates ranging from 0.2% to 3.5%. However, actual control of the tax is handed over to the regional administrations, which can create exemptions or changes to the minimum taxable base — meaning in some areas the minimum is much higher. For example, in the Madrid area there was a 100% exemption for many years. In 2024, Spain collected €2.1 billion with the tax, according to the national tax agency.

In Germany, the issue of how much wealthy citizens should pay into state coffers is a source of friction between Chancellor Friedrich Merz's conservatives and Social Democrat partners in the ruling coalition. The latter are close to Germany's labor movement and as recently as last week the DBG unions' federation called for the nation's wealth tax, which was suspended in 1997, to be reinstated, saying it could raise more than €20 billion a year. Other measures have also been floated to get the rich to pay more.

Back in the 1990s, Keele Business School’s O’Donovan says, a dozen or so European countries levied wealth taxes. But they mostly failed to bring in significant amounts or radically alter economic systems. In Sweden, for example, some have found evidence that after intense lobbying, the main burden fell on high and even mid-level earners, not the richest.

Now, financial tensions across Europe and the US are prompting a rethink in some quarters. A surge of spending during the Covid period, the energy crisis after Russia’s invasion of Ukraine and rising costs for welfare — and now defense — have saddled many European governments with higher debt. In the US, wealth taxes are also seen as a way to help get several state budgets back on track. 

In the meantime, many policymakers see limited scope for increasing other taxes, such as on income — the UK did so in a roundabout way recently by freezing thresholds for several years. The ongoing cost-of-living crisis also makes taxing consumption a challenge. 

“You are in that triptych where you need more money, the super rich have become richer, and they pay less taxes than the rest of the population,” said Quentin Parrinello, policy director at the EU Tax Observatory. That’s the research laboratory at the Paris School of Economics headed by prominent economist Gabriel Zucman, who’s called for a worldwide minimum tax of 2% on billionaires in a move that would hit about 3,000 of the world’s wealthiest.

Wealth tax advocates say rates for individuals should be co-ordinated across borders, in the same way that companies have begun to face a global minimum tax in a push to clamp down on tax havens. The rising number of exit taxes across the continent are a pre-emptive strike against that. 

On both sides of the debate emotions run high, as seen during the changes to the UK’s non-dom regime. Hannah Dart, a lawyer at the private wealth and tax team at Mishcon de Reya in London, says some wealthy clients feel they’re not valued in Britain. The fear is that those with the most creative ideas and capacity to generate will leave. And many wealthy say they aren’t focused on a race to the lowest tax rates. Often they only reluctantly leave behind personal relationships, schools and institutions. 

“What people really want is a fair system, a predictable system and a system in which they can plan for their future,” says Elsa Littlewood, London-based partner in the private client tax team at accounting firm BDO. 

Uneven tax rates on wealth and income are creating global winners and losers. For many rich Europeans, and even among just the well-heeled, Dubai and Abu Dhabi have emerged as magnets thanks to zero tax on pay and bonuses. Advisers also point to low-tax jurisdictions such as Monaco and Switzerland, long favored by the wealthiest. Tax arbitrage is playing out across various US states, where the “soak the rich’’ slogan gained political currency in the 1930s, while familiar hubs such as Singapore and Hong Kong continue to draw their share of the global elite.

Within Europe, Italy has become a somewhat surprising destination of late for the well-off. The country in 2017 unveiled a measure allowing wealthy individuals to pay tax at a flat rate of 100,000 euros a year on foreign-income. The government has since raised that to 300,000 euros, but it’s drawn interest, including from former UK non-doms still seeking to retain a foothold in Europe.

Emma Chamberlain, a barrister at Pump Court Tax Chambers in London and co-author of a number of tax text books and commissioner of the country’s 2020 Wealth Tax Commission, says she sees the introduction of wealth taxes in Britain — which some have called for — as highly unlikely. 

Until now, neither Britain nor America has ever had a net wealth tax. Mamdani has proposed tax increases that, while targeting income, bear striking resemblance to some of the wealth taxes mooted in Europe. And although his tax policies might have taken the opposite tack, even US President Donald Trump once proposed a one-time wealth tax as a means of reducing the country’s deficit.

“We’ve already got a host of capital taxes that don’t work,” Chamberlain says. “So I’m not sure why we’d introduce another one that doesn’t.”

(Adds details on Germany’s wealth tax discussions in 16th paragraph)

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