Taxing unrealized gains has caused an entrepreneurial exodus in Norway

[mediaman]

Norway doesn't care. It is a country with a reputation for good governance and northern-European economic strength. But economically, it is a country that is largely a gas station: like a democratic Russia with more competent governance.

Over half its economy is based on oil and mining. It has failed to develop meaningful economic diversification, and, because it has wisely banked so much of the proceeds of its oil (over US$300k per capita), there's not a lot of pressure to adapt.

Norway will not be a center of innovation anytime soon, except in oil-related fields. Eventually, as oil gets replaced as a source of energy, they may feel more pressure to change. But for now, they suffer from a more sophisticated version of the resource curse.

Sweden is an interesting counterexample, which has a lower GDP per capita but a much more diversified economy. Sweden abolished a wealth tax they used to have almost 20 years ago.

[vidarh]

Over half of the value of exports is oil and mining, but oil production, mining and quarrying directly employ only about 23,000 people, compared to 190,000 in manufacturing for example.

Because such a large portion of the oil proceeds are banked, it also distorts the rest of the economy far less than it otherwise would. Unless you live in very specific parts of Norway, you can go your entire life with hardly any exposure to the oil industry directly, or secondary interactions with major suppliers to the oil industry.

[m463]

I thought sweden did the same sort of thing until some famous person had > 100% tax rate and got politicians voted out in outrage.

EDIT: stackoverflow question:

https://skeptics.stackexchange.com/questions/15235/did-swedi...

[tim333]

I bet they do care. "Reputation for good governance" is usually a cultural thing. I doubt they want to turn into Venezuela.

[formerly_proven]

In a nutshell, Norway can afford to have some mildly self-sabotaging economic policies.

The rest of europe absolutely cannot (but that won't stop them, just like with rent control).

[msoad]

Norway has a good oil refinery industry though. They refine oil from other places because they're so good at it.

[wrp]

Is this tax because the state needs the money or is it social engineering?

[freefaler]

This is a bad solution to taxation. It brakes the long-established tax practice of "realization principle".

Suppose the same principle was applied to a home owner. At the end of each year your property is evaluated and you're taxed on the difference between last and this years price. You own an asset and this asset is valued by the rating agency as more expensive than before. Now you have a liability that you need to pay and if you don't you'll be in big trouble, because you owe the money to the government.

So independently of your own actions & impossible to predict you will need to plan for this expense. How many homeowners and rentiers would like that?

The "realization principle" in tax law specifies that income is not subject to tax until it is "realized" through a taxable event, such as the sale or exchange of an asset. In the US this was established in early 20th-century U.S. Supreme Court cases such as Eisner v. Macomber (1920). In this case it was established that mere appreciation in value does not constitute taxable income until a sale or exchange occurs.

Europe is not very business friendly. This regulation will make creating businesses even harder. When governments need more revenue they need to create more opportunities to create that revenue, not squeeze the current business tighter and tighter. Startups are risky, adding additional risk would just kill more of them sooner.

BTW, it's easy to fix "loan against my equity" evasion by classifying the "money has been loaned" as a "realization" event.

[jltsiren]

Wealth tax is a long-established practice in Germanic Europe. The list of countries that collected it in 1965 is kind of interesting: Austria, Denmark, Finland, Germany, Netherlands, Norway, Sweden, and Switzerland. Most of them eventually abolished it.

It made more sense in the past, when speculative valuations were less common and capital flight was less of an issue. It was collected from wealthy people, who could probably afford to pay. And it served as an additional incentive to invest your wealth productively. But then globalization arrived and made the drawbacks bigger than the benefits.

[skobes]

> You own an asset and this asset is valued by the rating agency as more expensive than before. Now you have a liability that you need to pay...

Isn't this exactly how property taxes usually work? (In the absence of caps like California Prop 13, that is.)

The realization principle is a hallmark of income tax law, but many taxes are not income taxes.

[devchix]

> Suppose the same principle was applied to a home owner. At the end of each year your property is evaluated and you're taxed on the difference between last and this years price.

This is exactly how state property tax is assessed in the US. You're not taxed on just the difference but the entire assessed value of the house. There have been cases of seniors who have bought and lived in their homes for 30, 40 years having to sell because they could not afford the tax after the value of their home went into the stratosphere. Similarly for poorer neighborhoods experiencing gentrification when property value shot up beyond what the original buyer paid, and they are forced out. When objections are raised on how a wealth tax would be infeasible to administer, my rejoinder is local governments levy it all the time, on the middle class, they just call it a property tax.

[HPsquared]

The other thing is what happens when the notional value goes down a year later? Do they get a tax refund?

[vidarh]

> Suppose the same principle was applied to a home owner.

Norway does apply the wealth tax to home owners. Though there is a discount factor for different types of assets, and the value of your primary home is discounted by 75%. There's also a minimum threshold.

[vidarh]

I've started several companies in Norway. When I moved to the UK, the wealth tax was not even remotely a consideration, even though my shares were at the time valued in the millions - we moved because getting the size investment we needed to grow in Norway was too hard at that time.

Yes, it can be a challenge for fast-growing startups where the secondary market is not very liquid, and is something people need to be aware of. It's not generally a major problem, in that if you can't find ways of structuring deals in ways that allow for ensuring the founders can afford the tax bill, the company just isn't doing very well.

[karencarits]

Note that the total tax burden has, at least seemingly, increased significantly under the current government [1]. So the conditions may have changed

[1] https://www.nho.no/tema/privat-eierskap/ny-menon-rapport-kra...

[bryanlarsen]

> This creates a perverse scenario where business owners must extract dividends or sell shares every year just to cover their tax bill. With dividend and capital gains taxes at around 38%, you need to withdraw approximately 1.6 million NOK to pay a 1 million NOK wealth tax bill.

Why wouldn't you just take a loan against the assets? A few percent of interest is a lot cheaper than 38%. In Canada you used to have to pay taxes on unrealized option gains, standard procedure was to take a loan to pay taxes. If the options gains disappeared, you'd use your next years tax refund to pay back the loan.

[SiempreViernes]

If they took a loan then they would have to stay and waste this perfectly good excuse to do what they wanted to do anyway.

[cscurmudgeon]

> A few percent of interest is a lot cheaper than 38%

Not sure why that is comparable.

[ivanche]

And how would they pay back a loan?

[greyw]

The funniest part about Norway rising the wealth tax rate so extremly is that bow revenue from that tax drastically fell. I guess they need to read up on the Laffer curve. The second funniest thing is that a huge chunk of rich norwegiens left for Switzerland a country, one of very few, that also has wealth taxation on all assets. The difference is only that its an order of magnitude lower.

[fragmede]

The references to Atlas Shrugged and the trains not running on time, and the bit about healthcare costs do not bolster any argument against a tax on unrealized gains, so this comes off more as ideologically motivated bit, rather than than an argument against the specific tax. Taxing unrealized gains is really problematic, as anyone in the startup scene who's been granted stock options in a rising startup in Silicon Valley can attest to. Paying a million dollars to the IRS because of AMT means you got a big payday, except for the fact that if you don't actually have a million dollars, you then have a problem. Most people don't have a million dollars to begin with so you can't pay that bill and you take a loan from sketchy loan shark, whole repeating the mantra, 100% of $0 is $0. 70% of a big number is still a big number.

Looking at the US, rasing taxes on the rich and doing more against unrealized gains won't happen for at least four years, so we don't have to worry about that, at least.

[no_wizard]

Taxing unrealized gains in a blanket way is bad but a more targeted threshold, such as taxing them when used in loan arrangements in which someone borrows against their holdings to avoid paying taxes on realizing the gains, seems like it would achieve the spirit of such a tax

[vidarh]

The tax bill for ~$10m is <$90k. You don't need to take a loan from a sketchy loan shark - if you're remotely aware of this issue, you structure your investment agreements to account for lending you the money, and now you're taxed on commercial interest rates for it only, until there's a liquidity event.

This is a problem if you have no clue about the tax system and don't seek advice before your company has already reached a huge size.

I was 19 when I set up my first company in Norway, and had no prior exposure to business - I still knew the wealth tax was a thing to be aware of.

[karencarits]

Please note that the main criticism in the Norwegian debate is currently how this kind of taxation discriminates Norwegian ownership and gives a disadvantage in terms of competition, in comparison to foreign business owners

[DataDaoDe]

Here's a thought: as long as some countries somewhere have enough freedom to innovate, and entrepreneurs can leave their countries and get to the freer ones, countries like Norway can piggyback off all the innovation from others (or outsource it). I think it would only be a problem if for some reason there was technology that couldn't be copied.

[freefaler]

How will they pay for that technology they need to import when the oil ends? They'd need to barter something for something else.

[j7ake]

It’s not surprising, but I don’t think people of Norway care about entrepreneurs so it doesn’t matter.

[jplrssn]

Not surprising that an Atlas Shrugged reading entrepreneur dislikes taxation.

But government services cost money, and by other accounts [0] Norway are doing pretty well:

Norway performs well in many dimensions of well-being relative to other countries in the Better Life Index. Norway outperforms the average in jobs, work-life balance, education, health, environmental quality, social connections, civic engagement, safety and life satisfaction.

[0] https://www.oecdbetterlifeindex.org/countries/norway/

[jjtheblunt]

Does Norway perform well in various well-being metrics essentially because Norway is extremely oil rich?

(I don't pretend to know the answer, and ask because I don't see how to figure that out)

[SiempreViernes]

Careful, did you pay him the three dollars it costs to quote his text?!

[Aeolun]

Anyone that gets taxed more than they have money to pay is inclined to dislike that taxation. I completely agree with the wish to not cannibalize hour company before it’s even properly profitable.

They’re ‘unrealized gains’ for a reason.

That said, I also feel there is a way to do this tax properly.

[danudey]

Is a man not entitled to the unrealized sweat of his brow?

[cbmuser]

I have lived in Norway for a year and it’s definitely not as bright as you’re painting it.

Rent prices are extremely high and apartments are quite small compared to other European cities.

Alcohol is so expensive, that Norwegians go on alcohol shopping tours to Sweden.

Trains in Oslo don’t run 24 hours, so you have to take long detours with busses at night or pay obnoxiously high rates when taking a cab.

No, Norway is definitely not the paradise you’re trying to make it.

Also, these people that left Norway weren’t against paying taxes. They were against the socialist government trying to rip them off with a completely unfair taxation.

[HPsquared]

For a small country with that much oil money, "better than average" is a pretty low standard.

[SiempreViernes]

Holy shit, this blog tries to sell me the the right to highlight text!

This gotta be the most extreme instance of NFT brain I've ever encountered...

[barbazoo]

You misunderstand. You pay to "collect this highlight to permanently own it", not just highlight it.

[Analemma_]

It's hilariously self-defeating how I'm encountering this """"feature"""" for the first time on an article complaining about taxation. Like, you might have done a better job convincing me of the evils of government, if it wasn't directly alongside your vision of an ultra-capitalist nightmare hellscape where I have to pay to highlight text!

[zorobo]

I’m okay with taxes on unrealized gains if I can get money from unrealized losses (and not just tax credits).

[digibeet]

Is this satirical? If it is, well done you could've fooled me with the whole Norwegian perspective. If it isn't, damn how much of a caricature can you be.

[seryoiupfurds]

If you ask a socialist to describe their ideal world, it is one in which everyone is equally poor.

They see "taxing the rich" first and foremost as punishing an ideological enemy, with little thought given to actually maximizing the tax revenue they can collect from them over time.

[asadotzler]

If you build strawmen it's easy to knock them down.

Socialist mostly want a floor so people don't starve to death or lose their roof to medical bills. That floor would be quite easily to establish at a comfortable life for 10 billion people on this planet while still allowing for more than enough many times over millionaires.

[exe34]

easy, impose an exit tax. capital doesn't need to be free when it's trying to evade justice.

you pay tax on unrealised gains the same way the rest of us do when facing an unexpected bill that we can't afford - you sell your stuff.

[HeckFeck]

You do realise they were taxing the entrepreneurs before their companies made a profit? What sort of "justice" is that?

[Aloisius]

Norway already has an exit tax which levies a 37.84% tax on unrealized gains.

The "easy fix" isn't working for some reason. Perhaps a one-time tax is still preferable to an ongoing one.

[occz]

The article mentions the existence of such a tax.

[cscurmudgeon]

Law != justice.

Else, you won't have the concept of unjust laws.

[kingstoned]

It's amazing to me that on a startup-oriented forum like this one you see these kinds of socialist comments when it comes to something that is harmful to startup founders and the entire ecosystem. Honestly curious to see what people who are hostile to entrepreneurship are even doing here.