Norwegian labour union boss Roar Flåthen is normally a great ally of Norway’s Labour-led government but now even he has spoken out against one of the country’s most unique and controversial taxes, on individual fortunes. The government is resisting Flåthen’s initiative, mostly for fear of losing the revenues it brings.
Every year, in addition to figuring out their income taxes, Norwegians have to add up the value of all their assets, subtract their debts and then pay tax on their net worth known as formue (fortune). The tax is called formueskatt and it’s ranked for years as one of the country’s most hotly debated.
That’s because many argue the cash and material wealth that’s being taxed already has been taxed several times before, not least when it was earned. The tax arguably encourages debt, since it will reduce tax liability, and discourages savings. Balances in bank accounts, which Norwegian banks are obliged to report to the state, are taxed krone for krone, while real estate is taxed at no more than 30 percent of its market value and the value of motor vehicles is depreciated. Individual taxpayers are exempt up to the first NOK 700,000 (about USD 120,000) of their net worth but after that, they have to pay 1.1 percent in tax on the size of their fortune, year after year.
The tax rate may not sound like much, but older Norwegians with lots of equity in their homes and little if any debt can easily wind up paying tens of thousands in formueskatt. Business owners, especially small business owners, arguably get hit the hardest, since their personal fortunes are intrinsically linked to their business assets. Norway is one of the only countries in Europe where a company’s working capital is taxed, so it can be more profitable for a foreign investor to own a Norwegian business than a resident of Norway who has to pay fortune tax. Many businesses don’t have the cash readily available to pay the tax due on, for example, the value of inventory, and business owners have to dip into their savings. Many claim they would much rather use the money they pay in fortune tax to invest in their businesses and possibly create new jobs.
That’s why Flåthen, leader of Norway’s trade union confederation LO, has now decided the government should evaluate eliminating the fortune tax even though many of those getting tax relief would be among the wealthiest in the country. “We have concluded that it would be sensible for the government and the Finance Ministry to go through the negative consequences that formueskatt has for Norwegian ownership, Norwegian industry and Norwegian jobs,” Flåthen told newspaper Dagens Næringsliv (DN) on Tuesday. Flåthen now fears the tax can hinder investment in Norway. Other media quickly seized on DN’s scoop, since it’s seldom Flåthen and LO oppose the taxes that fund Norway’s social welfare state, and Wednesday’s papers were full of debate.
Prime Minister Jens Stoltenberg of the Labour Party normally listens closely to what Flåthen has to say, but he doesn’t want to launch into a debate on the controversial tax right now. He’s acutely aware that formueskatt raises around NOK 13 billion a year in tax revenues for a state budget he’s already admitted will be tight this year. His government will release its proposal for the 2012 state budget on Thursday and Stoltenberg is already faced with many other divisive issues within the three-party government coalition he leads and doesn’t need a debate on formueskatt to be another. Coalition member SV (the Socialist Left party) is a staunch defender of the tax, seeing it as a great equalizing factor in reducing differences between rich and poor in Norway, and SV politicians have made it clear that the only changes they’ll agree to in the formueskatt is a proposed increase of it.
Might ‘take a look’
Stoltenberg, always keen on preserving jobs and creating them, though, has indicated some willingness to “take a look” at the fortune tax, as has the third government coalition partner, the Center Party. But they’re already warning that any funding loss from changes in or even elimination of the formueskatt would have to be offset by raising other taxes or creating new ones. One proposal is a national property tax – at present, it’s up to local governments to levy property tax and many communities haven’t resorted to it because of its unpopularity. There is, however, a nationwide fee imposed on the purchase price of real estate (called omkostning, omk) and it’s often referred to as a form of property tax.
Stoltenberg’s government, in power for the past six years, can also boast that it has actually reduced the burden of formueskatt on Norwegian taxpayers, by raising the exemption level among other things. According to state statistics bureau SSB, around 1.2 million Norwegians had net worth large enough that they had to pay fortune tax in 2005. By 2009, the number was down to just under 778,000 despite a boom in real fortunes because of rising real estate prices.
Flåthen has found some support for at least a review of formueskatt from Norway’s powerful but affable finance minister, Sigbjørn Johnsen. He’s also from the Labour Party with close ties to Stoltenberg and he agrees with Flåthen that the government should look at ways of improving how the fortune tax is imposed.
“I’m greatly concerned with ways of strengthening growth of Norwegian business,” Johnsen told DN. “Many tools are needed for that. The formueskatt must be evaluated from an overall perspective.”
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