Spain Study Shows: Wealth Tax Does Not Drive the Rich Away

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Wealth taxes do not automatically lead to the super-rich leaving the country. This has now also been demonstrated by a new study from Spain. The study examined how many wealthy individuals relocated their residence following the reintroduction of the Spanish wealth tax. The result: over a six-year period, far fewer people moved than expected. Even within Spain itself, where wealthy individuals were able to move to a tax-free region without major obstacles, there was no mass exodus of the rich.

Whenever wealth taxes are discussed, it is often claimed that taxing the rich more heavily drives them out of the country. It is usually difficult to verify whether this is actually true.

Spain nevertheless offers ideal conditions for doing so. There are a total of 17 regions there, each of which has the power to make its own decisions in many areas – including wealth tax. As a result, different tax rates apply in Spain depending on the region. In recent years, wealthy individuals have therefore been able to save on tax by moving within the country, without even having to leave it.

Spain’s regions decide for themselves on wealth tax

The Spanish wealth tax dates back to 1978 and is therefore an integral part of the Spanish tax system. The revenue from the tax goes directly to the various regional governments. They also decide the threshold above which the tax applies and how much it amounts to.

It is the net assets that are taxed. This means that a person’s total assets are reduced by their debts. In many regions, the first 700,000 euros are also exempt from tax. Only the portion exceeding this amount is then taxed. Exemptions from wealth tax apply, for example, to one’s main residence or family businesses.

Madrid wanted to become a Spanish tax haven by introducing a zero tax rat

During the financial crisis between 2008 and 2011, the Spanish wealth tax was temporarily suspended. Following its reintroduction, the regions were able to set their own tax rates. Some regions decided to refund the tax in full, meaning that the effective tax rate there was zero.

Madrid adhered to this rule for the longest period. The Spanish capital region sought in this way to become a tax haven (also known in Spanish as a ‘paraíso fiscal’) within its own country.

Other regions followed Madrid’s example. When Andalusia also set its wealth tax to zero in 2022, Madrid’s right-wing conservative regional president, Isabel Díaz Ayuso, congratulated the region of Andalusia on the ‘paradise’ it had created. On X, she wrote:

‘People of Andalusia: Welcome to the (tax) “paradise”’

For the super-rich, moving to Madrid was straightforward

Madrid’s conservative government deliberately accepted that revenue would be lost as a result of the zero tax rate. After all, Madrid anticipated that more wealthy people would move to the capital region and pay high income tax there.

For high-net-worth individuals, moving could be worthwhile. A person with three million euros of taxable assets saved around 9,400 euros a year by taking up residence in Madrid. For even larger fortunes, the savings were correspondingly higher.

The general conditions for moving within Spain were also favourable. High-net-worth individuals did not have to learn a new language or switch to a different tax system.

Economists David Agrawal, Dirk Foremny and Clara Martínez-Toledano investigated how many wealthy individuals had taken advantage of this opportunity in a study. To this end, they tracked the behaviour of wealthy Spaniards over several years.

After six years, there were only 7.5 per cent more wealthy individuals living in Madrid

Moreover, a few wealthy individuals did in fact relocate their tax residence to Madrid. Six years after the reintroduction of the wealth tax, the number of wealthy individuals with tax residence in the capital region rose by around 7.5 per cent. In the other regions, however, it fell by around 1.7 per cent.

According to economist Dirk Foremny, the effect is therefore surprisingly small:

“Given that moving within a country is easier than moving abroad, this […] is a very low figure and significantly less than many theoretical models would suggest.”

The actual figure is likely to be even smaller: not every new place of residence represented a genuine move

Foremny goes on to warn that the study only took tax residence into account. However, many wealthy people own several properties. Some may therefore have declared a second home in Madrid as their main residence without actually moving their centre of life there. The Spanish tax authorities have already uncovered a number of such false declarations.

It is therefore not always possible to determine whether the wealthy have actually moved to Madrid. The 7.5 per cent figure includes both genuine moves and feigned changes of residence. The actual number of people who moved to Madrid because of wealth tax is therefore likely to be even smaller.

Why most wealthy people do not move away

Taxes are not the only reason why people live in a particular place. Wealthy people also have families, friends and professional networks. Their children attend schools, and they themselves own businesses and property. Changing one’s place of residence also incurs costs. A person has to find a new home, adjust their social relationships and possibly put up with longer commutes.

The greater the potential tax saving, the more likely it is that this effort will be worthwhile. However, the Spanish study shows that, for the vast majority of high-net-worth individuals, even Madrid’s zero tax rate was not a sufficient reason to change their place of residence.

Tax avoidance cost all regions money

For the other Spanish regions, the departure of high-net-worth individuals meant lower income tax revenue. But even for Madrid itself, the maths didn’t quite add up: according to the study, Madrid could have collected more revenue overall if all regions had levied a joint wealth tax.

The zero wealth tax was therefore not only a problem for the surrounding regions; it also brought Madrid far less additional revenue than originally hoped for.

Sánchez’s central government puts an end to tax competition

In late 2022, the progressive Spanish central government led by Pedro Sánchez responded to this regional tax competition with a new model for wealth tax. This time, the tax was to apply nationwide.

The so-called ‘solidarity tax’ applies to net assets exceeding three million euros. Tax rates start at 1.7 per cent and rise to a maximum of 3.5 per cent. The highest rate applies only to very large fortunes.

Those who already pay wealth tax in their region will not be taxed twice. If, on the other hand, a region sets its tax rate at zero, the money goes to the central government rather than the regional government.

The new regulation had swift consequences. Madrid abolished its zero-rate tax. Since 2023, people there with assets exceeding three million euros have once again had to pay wealth tax.

In Austria, too, a wealth tax does not lead to a mass exodus

In Austria, too, it is often claimed that wealthy people would simply pack their bags and leave if a wealth tax were introduced. But it’s not quite that simple. If someone moves away, a kind of exit tax may apply. Furthermore, a new place of residence on paper is not enough: anyone who continues to live in Austria or has the centre of their life here remains liable for tax here. We’ve explained this in more detail here.

Austria abolished its wealth tax in 1993. However, there is ongoing debate about reintroducing it, partly because wealth inequality in Austria is greater than in any other country in the eurozone. Depending on the model, a tax on large fortunes would affect only the richest 2 per cent of the population and raise around 3 billion euros a year. The SPÖ is in favour of such a wealth tax. However, this proposal is not included in the coalition government programme with the ÖVP and NEOS – even though the majority of the population is also in favour of a wealth tax.

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