Fiscal Competition and the Rise of Golden Visa Programs

Definition: Fiscal competition describes the behavior of governments that compete to attract mobile capital (e.g. businesses, entrepreneurs, and people with high-net-worth) by offering favorable tax rates, favorable regulations and residency incentives.

Application: Golden visas and other entrepreneur residency schemes are a prime example of modern fiscal competition. Countries like Portugal, Spain, Hungary, and Malta have made strategic efforts to use immigration and tax incentives to attract global talent and capital. In exchange for investment or entrepreneurship activity, these programs offer residency rights, often side-stepping immigration barriers that have been in place for decades.

What’s Driving the Trend?

Globalization and the rise of digital finance have accelerated the mobility of capital and talent to an unprecedented degree. Wealthy individuals and businessmen are no longer confined to their country to work and do business. In reaction, several countries have moved from a restrictive and protectionist model to an open and competitive one, actively promoting their jurisdictions as attractive destinations to invest.

Hungary, for instance, has recently reintroduced its golden visa program, called the ‘Guest Investor Program’, which enables third-country nationals to obtain residence in Hungary through an investment of as little as €250,000 into a real estate fund. Portugal’s version, in contrast, has long been known for the need to invest €500,000 or more, although it was recently revised to leave out real estate in favor of business and research.

Why Countries Compete

Governments implement golden visa programs for various motives:

Revenue Generation: Financial returns can be gotten from these programs directly through application fees paid by investors and/or indirectly from investment and consumption.

Human Capital Accumulation: Entrepreneur-focused programs seek to lure business builders and knowledge workers who promote innovation and employment.

Soft Power and Influence: By issuing residential permits or citizenship to global elites, a country extend its influence, economic influence, and diplomacy beyond its borders.

The reasoning is similar to that of corporate tax competition. Just as nations drop income tax rates to lure multinationals, they also design immigration incentives to compete for affluent individuals and industrious entrepreneurs.

Economic Ramifications

Although the economic motivations are clear, these programs are not without risk and consequences:

Rising Housing Prices: In cities such as Lisbon and Budapest, demand related to the golden visa has been blamed for driving up housing prices. 

Two-Speed Citizenship: There are criticisms that these schemes create a class divide in immigration by favoring the rich, while more vulnerable would-be migrants are consigned to long waiting lists and complex processes.

Regulatory Arbitrage: Many participants rely on golden visa jurisdictions to avoid taxes or to hide assets, prompting institutions such as the OECD and the European Commission to call for stricter regulation.

Despite the criticisms, demand is still high. Global demand for investment migration has surged by more than 60 percent since 2019, according to Henley & Partners, a leading consultancy in the field. The post-pandemic uncertainty, political instability, and increasing global inequity have only accelerated the appeal.

A Competitive Market for Residency

From an economic point of view, the rise of programs like residence in Hungary exemplifies how governments are transforming into service providers in a fiercely competitive global market. In exchange for private capital, they provide legal access and tax benefits. It’s a market that operates in much the same way as traditional goods and services:

·      Nations distinguish their offerings by price, lifestyle, taxation, and travel opportunities.

·      Consumers (investors across the globe) weigh these characteristics and decide based on their personal utility and risk tolerance.

·      The net effect is a market equilibrium in which only the most appealing schemes survive.

Conclusion

Golden visa programs aren’t just legal or political tools, they’re a fiscal weapon, ones that are woven into the logic of fiscal competition. With capital more and more mobile and digital, and geopolitical risk on the increase, there is likely to be increasing demand for these kinds of programs. The nations that strike the right balance between access, transparency and long-term economic benefits are likely to be the winners in this global residency race.