The Long Run is Short in Norway

A news article caught my eye recently. It was describing the results of recent tax increases in Norway, and the responses to those tax increases which apparently caught the policymakers off guard.

This isn’t the first time I’ve made reference to Adam Smith’s famous analogy about social planners and chess, nor will it be the last. But the relevant part of that analogy for this story is when Smith describes how the planner often “does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” What the policymakers in Norway apparently failed to consider is the way the rich might respond to a tax policy of “soak the rich.” It turns out that more often than not, the rich don’t particularly like being soaked, and when you make it more expensive to live or do business in a particular place, fewer people will want to live or do business there.

According to the article, in response to tax increases aimed at “super-rich Norwegians” (apparently defined as multimillionaires or billionaires), these taxpayers are just packing up and leaving Norway, and apparently many “have moved to Switzerland, where taxes are much lower.” The number of wealthy citizens who departed Norway within a few months of this tax increase was “more than the total number of super-rich people who left the country during the previous 13 years” combined, and “even more super-rich individuals are expected to leave this year” which will end up “costing the government tens of millions [in] lost tax receipts.”

Among those who have departed is Kjell Inge Røkke (I hope I’m pronouncing that right!), who in the previous year “was the country’s highest taxed individual.” Not only will the Norwegian government not collect any additional revenue from him due to this tax increase, it will now lose all of the tax revenue he had previously been paying, which will have an impact of “about NOK 175m in lost tax revenue a year.” It was also estimated that “he has paid about NOK 1.5bn in tax since 2008.” Going forward, however, this particular goose will be laying his golden eggs in Lugano.

So, how big was this tax increase, to have provoked such a large and swift response? According to the article, the policy change consisted of “a relatively small increase in tax aimed at the country’s super-rich, who face wealth taxes at both the local and state level. That includes a municipal tax of 0.7% on assets in excess of NOK 1.7m for individuals, or NOK 3.4m for couples. There is also a state wealth tax rate of 0.3% on assets above NOK 1.7m. In November, the government raised the state rate to 0.4% for assets above NOK 20m for individuals, and NOK 40m couples, taking the maximum wealth tax rate to 1.1%.” I may have been a bit facetious with my “soak the rich” comment before – the total tax increase is quite small in percentage terms, and certainly smaller than the kinds of wealth taxes proposed by Elizabeth Warren.

The Laffer Curve is worth reviewing here. The basic phenomenon of the Laffer Curve is uncontroversial among economists – the controversy about the Laffer Curve is not whether it is real, but where it peaks. But the question of where the Laffer Curve peaks is itself an oversimplification. The short-run Laffer Curve will look different from the long-run Laffer Curve. The additional tax revenue collected in the long run from increased tax rates will be smaller than what is gathered in the short run, because it takes time for people to adjust their behavior in ways to offset the increased taxes. But technology is making the short run very short indeed. Advances in technology and the rise of remote work are making it easier and easier for people to relocate to new environments with less burdensome taxes and regulations. As Røkke says, “For those close to the company and to me, I am just a click away.”