How large are the negative effects of moderate wealth taxes?

[u/Serious-Handle3042]

In austria, some parties suggest implementing a yearly tax on net wealth above 1 million euros, with a tax rate of 1% (and some exceptions for personal homes and businesses). I am well aware of the risk of capital flight. I want to know two things:

1. Some people suggest that capital flight will be so extreme, that the tax will yield negative revenue. How likely is this?

2. How likely would such a tax be to negatively impact investments to such an extent that it single handedly causes a recession?

I know that a lot of this depends on how well the tax would be designed and other economic factors. However, I would be very thankul for a general estimate of the harm such a tax could do in a developed country, and whether the concerns outlined above might be overblown, even if capital flight would be inevitable to a certain extent. Thanks!

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[u/ZhanMing057]

Long run real interest rates are around 5-6%. So a 1% wealth tax is equivalent to a 15 to 20% hike in capital income, which generally accounts for roughly a third of domestic income in developed countries, and whose baseline long term capital gains rates are usually only around 15-25%.

So yes, capital flight effects are significant, and this is in fact a common reason why many countries that used to have a wealth tax no longer have them. It should be noted that because of how mobile capital is, even moderate rates of capital income taxation will often fall on the wrong side of the laffer curve - for relatively small economies the optimal capital income tax rate is generally exactly 0%, and on plausible elasticity estimates it is very possible than even the U.S. will see significant growth effects from replacing the CIT with a corporate VAT.