Can You Tax Wealth That Doesn’t Exist Yet?

Imagine waking up to a six-figure tax bill on shares you cannot sell.

That sounds like a trick question in a finance exam, but it sits at the heart of Denmark’s latest tax debate. Prime Minister Mette Frederiksen’s Social Democrats have proposed a 0.5% annual tax on net wealth above DKK 25 million (DKK 50 million for couples), presented as a way to ensure the richest Danes contribute more to the welfare state. The party estimates the policy would raise around DKK 6.5 billion per year.

Few voters lose sleep over the tax planning of multimillionaires. As Bloomberg recently noted, the proposal also places opposition parties in the awkward position of spending campaign airtime (general election coming up) defending the country’s wealthiest households. Clever move…

The issue isn’t whether wealthy people should contribute more. In a high-trust society like Denmark, that principle enjoys broad support. The core debate is about what kind of wealth is being taxed, and whether governments should tax wealth that exists primarily as a valuation rather than cash.

Consider the typical startup founder. Their balance sheet rarely resembles the caricature of a millionaire sitting on piles of liquid assets. Instead, it usually looks something like a modest salary, an apartment with a mortgage, and a large ownership stake in a company whose value currently exists mostly on venture-capital term sheets and investor presentations…

Suppose a founder owns 20% of a startup valued at €50 million. On paper, that stake is worth €10 million. In practice, it is an illiquid and uncertain claim on the future. There is no market where the founder can casually sell a few percent of their company to cover an annual tax bill.

Until an exit or liquidity event occurs, the wealth largely exists on spreadsheets.

Tax that valuation every year and the founder faces three options, 1) sell shares earlier than planned, 2) borrow against their equity, 3) move somewhere the tax does not apply… None of these outcomes are particularly helpful if the goal is to build globally competitive companies and/or to keep European talent building them at home, if you ask me.

Last year, economist Gabriel Zucman was asked to examine whether France should introduce a minimum tax on billionaires’ wealth, aimed at ensuring the ultra-rich pay at least a certain effective rate. The proposal largely targets individuals whose fortunes are held in liquid public securities, where valuation and liquidity are straightforward.

A distinction that matters

A tax aimed at billionaires with large portfolios of publicly traded assets is one thing, but a tax that applies broadly to illiquid ownership stakes in private companies is something else entirely. Young technology companies often spend years in a strange financial state where valuations rise while cash remains scarce. Those are precisely the years when founders should be focused on building products, hiring engineers and finding product-market fit, not figuring out how to finance an annual tax bill tied to venture valuations!

What it could lead to is founders selling earlier than they otherwise would, investors structuring ownership more defensively, and the most mobile people in the ecosystem, entrepreneurs, venture investors, and highly skilled engineers, starting to consider building their next company somewhere else.

Economists call this capital mobility. Which means that the people most capable of creating new companies usually have options about where to build them.

This also comes at an awkward moment for European tech. Across the Nordics and the continent more broadly, founders and investors are increasingly trying to build together rather than apart more than ever. Policies that make building in Denmark less attractive risk becoming a quiet subsidy to its neighbours, sending talent, capital and the next generation of ideas across the Øresund Bridge, if not further..

Denmark has spent decades constructing an economic model that attracts talent strong institutions, excellent education and a deep pool of technical skill capable of producing globally competitive companies. The question now is not whether successful people should contribute to that system, of course they should, but whether taxing unrealised, illiquid founder equity is the right way to do it.

What could this mean for Denmark?

At first, probably a handful of founders selling earlier than planned, a few investors restructuring their holdings, perhaps some entrepreneurs deciding to build their next company somewhere else. But if enough founders make that calculation, fewer companies are started locally, fewer scale into global businesses, fewer highly paid engineers, operators and investors emerge from those companies.

Over time that means fewer corporate taxes, fewer high earners contributing to the system, and fewer reasons for the next generation of founders to build in Denmark rather than somewhere else…

What begins as a policy designed to raise more revenue from success risks, in the long run, producing less of it.

Painting: Georg Emil Libert’s “View of Sommerspiret, the Cliffs of Møn” (1846)

Sources

• Social Democrats: proposal for a Danish wealth tax (thresholds and expected revenue)

• Bloomberg: Denmark’s Premier Mette Frederiksen Bets on Wealth Tax to Stay in Power

• EU Tax Observatory: Gabriel Zucman proposal for a minimum tax on billionaires

• Le Monde: France debating minimum taxation on billionaires’ wealth

• OECD:The Role and Design of Net Wealth Taxes