Net Wealth Tax Research Articles

Wealth Taxation and Household Saving: Evidence from Assessment Discontinuities in Norway

Abstract Neither theory nor existing empirical evidence support the notion that wealth taxation reduces saving. Theoretically, the effect is ambiguous due to opposing income and substitution effects, and empirically, the effect may be masked by misreporting responses. Using geographic discontinuities in the Norwegian annual net-wealth tax and third-party-reported data on savings, I find that wealth taxation causes households to save more. Each additional NOK of wealth tax increases annual net financial saving by 3.76, implying that households increase saving enough to offset both current and future wealth taxes. This positive effect on saving is primarily financed by increases in labor earnings. These responses are the combination of small negative effects of increasing the marginal tax rates and larger positive effects of increasing average rates. My findings imply that income effects may dominate substitution effects in household responses to rate-of-return shocks, which has implications for both optimal taxation and macroeconomic modeling.

Tax principles, policy feedback and self-interest: cross-national experimental evidence on wealth tax preferences

Abstract Rising wealth inequality and squeezed public budgets has brought wealth tax back into policy discussions. A net wealth tax might help to boost state revenue and reduce wealth inequality. Yet little is known about citizens’ attitudes towards the design of a net wealth tax (i.e. the tax unit, exemption and rate). Using a novel multifactorial survey experiment, we examine citizens’ endorsement of fundamental principles of taxation. Building on policy feedback theory, we examine if preferences differ in three policy arenas (USA, Germany and UK) and whether individuals’ reasoning is dependent on self-interest. While a clear majority in all three countries generally endorses a wealth tax, our findings show that citizens care more about the amount exempted than the tax unit or rate. We do not identify a preference for any specific tax unit. Furthermore, tax preferences seem to be strikingly similar among citizens of all three countries. Yet we show that individuals are mostly concerned about not being personally affected by such a tax, which is reflected in their preference for substantial exemptions. We discuss our findings with regard to our understanding of wealth inequality, tax equity and the potential implications for policymakers.

Do Net Wealth Taxes Improve Social Fairness?

Do Net Wealth Taxes Improve Social Fairness?

An imperfect wealth tax and employment in closely held firms

AbstractFuelled by increasing inequality and rising fiscal deficits, the interest in wealth taxation has grown over recent years, both in the public debate and in academia. A key concern is that the wealth tax may reduce the amount of capital available to closely held firms and drag down their employment. Yet knowledge about the behavioural effects of a wealth tax is limited. A wealth tax is almost by construction imperfect, as the value of some assets is unobserved. In particular, intangible assets held by non‐traded firms are in practice tax‐exempt, giving firm owners an incentive to allocate wealth into their businesses, for example, in the form of (untaxed) human capital investments. We utilize rich Norwegian register data and a series of tax reforms implemented between 2007 and 2017 to study how a net wealth tax imposed on owners of small and medium‐sized businesses affects their firms' employment. Identification of causal effects is based on a saturated control function approach, fully isolating the influence of tax reforms. Our results indicate a positive causal relationship between the level of a household's wealth tax and subsequent employment growth in the taxpayers' closely held firms.

A Wealth Tax at Work

Abstract Over the past decade, the question of whether and, in the event, how to tax household wealth has risen to the forefront of policy debates across the world. As Norway belongs to only a handful of countries that (still) levy an annual net wealth tax, we use the Norwegian example to review the case for annual taxation of wealth. Our discussion benefits from the use of rich administrative data, enabling us to provide a comprehensive set of empirical facts that are useful in assessing the merits of wealth taxation. We consider some of the central issues in the wealth tax debate: how the taxation of wealth fits in with personal income tax, distortionary effects, redistributional effects, and the extent to which wealth taxation may cause adverse liquidity effects for private firms. Taken together, we consider that the evidence presented here does not weaken the case for maintaining the tax in the Norwegian case: we find favorable distributional effects and efficiency losses appear to be limited (JEL codes: H21, H23, H25, and H31).

A Harmonized Net Wealth Tax in the European Union

AbstractWhile taxes on wealth for a long time played only a marginal role in the public finance and taxation literature, the increase of wealth inequality and concentration in many EU countries has spurred new interest in wealth taxation. At the same time, recurrent net wealth taxes have almost completely disappeared in Europe, inter alia due to fears of asset and taxpayer migration. The paper provides estimates of the revenue that could be raised from an EU-wide net wealth tax enabling the containment of migration responses, using data from the Household, Finance and Consumption Survey (HFCS). To account for differential non-response, we augment the HFCS with data from the Forbes rich list as well as national rich lists and replace the top tail of the wealth distribution according to the HFCS by an estimated Pareto distributed top tail. To account for under-reporting we scale aggregate financial assets in the HFCS to match their counterparts outlined in the National Accounts. We estimate that a moderately progressive net wealth tax levied at a rate of 1% on net wealth between € 1 and € 5 million, and 1.5% on wealth above € 5 million, could raise between € 165 and € 177 billion after accounting for avoidance and evasion responses. Such an EU harmonized net wealth tax would affect only a small fraction of households, ranging between 0.41% in Latvia and 8.65% in Belgium.

Public support for tax policies in COVID-19 times: evidence from Luxembourg.

We study attitudes towards the introduction of hypothetical new taxes to finance the cost of the COVID-19 pandemic. We rely on survey data collected in Luxembourg in 2020. The survey asks for the agreement of respondents over: a one-time net wealth tax, an inheritance tax, a temporary solidarity income tax, and a temporary increase in VAT. All questions include different and randomly assigned tax attributes (tax rates and exemption amounts). We find a clear divide with relatively high support for new wealth and inheritance taxes on the one hand and a low support for increases in VAT and income taxes on the other hand. While 58% of respondents agree or strongly agree with a one-time tax levied on net worth, only 24% are in favor of a small increase in VAT. Support for any tax is however negatively associated with the size of the tax as measured by the predicted revenues. Our results indicate that a one-time wealth tax could raise substantial revenues and still garner public support.Supplementary InformationThe online version contains supplementary material available at 10.1007/s10797-022-09744-y.

Policy Note: Is the Inheritance and Gift Tax a Reasonable Alternative for the Net Wealth Tax?: A Legal and Economic Analysis Across OECD Countries

Net wealth taxes are one of the most controversial topics in taxation. Strained government finances due to the Covid-19 pandemic and the increasing inequality in the distribution of wealth are fuelling this debate. While some countries (especially France: The net wealth tax – referred to as the ISF (impôt sur la fortune) – was abolished in 2017) have abolished net wealth taxes, their (re)introduction is being considered in others (for example, Austria, Germany, and the United States). Unfortunately, legal and economic arguments are rarely brought together in the public discussion, and the academic tax community has remained relatively quiet. Given the politically delicate nature of net wealth taxes, an interdisciplinary discussion seems necessary. This policy note focuses on the policy discussion on net wealth taxes from both economic and legal perspectives. It begins by identifying the characteristics of a net wealth tax compared to related taxes, such as property taxes and inheritance and gift taxes (Chapter I.). This is followed by an overview of the status quo of net wealth taxes and wealth-related taxes in the OECD (Organisation for Economic Cooperation and Development) countries (Chapter II.). Building on this, the article deals with the main arguments proposed in the literature in favour of and against the (re)introduction of net wealth taxes (Chapter III.). Since a net wealth tax has far-reaching effects on economic decision-making and on taxpayer compliance, a purely legal analysis is necessarily incomplete and requires an economic counterpart. Likewise, economically motivated tax reform proposals require an analysis of their legitimacy. A comprehensive discussion therefore requires a simultaneous legal and economic analysis. Since net wealth taxes are predominantly justified with distributional reasons, this note also discusses whether an inheritance and gift tax represents a reasonable alternative to a net wealth tax (Chapter IV.). After all, an inheritance and gift tax could also counteract the inequality of wealth. The objective of this article is to provide an interdisciplinary basis for the tax policy debate on wealth-related taxes. Wealth tax, gift tax, inheritance tax, wealth-related tax, valuation, enforcement, compliance cost, redistribution, international comparison, competitive advantage

“Poison to the Economy”: (Un-)Taxing the Wealthy in the German Federal Parliament from 1996 to 2016

The concentration of wealth is a key component of the rise in economic inequality at the beginning of the twenty-first century. While the abolition of taxes on private wealth during the 1990s and 2000s is recognized as an important institutional driver behind this development, comparatively little is known about the justification of tax cuts for the wealthy in advanced democracies. This paper investigates how the abolishment of the personal net wealth tax in Germany, a country with high levels of wealth inequality, has been debated and justified in parliament over a period of 20 years. Using a mixed methods approach that combines computational social science methods and a qualitative analysis, we examine how Germany’s two major parties, the Christian Democrats (CDU) and the Social Democrats (SPD), have variously construed the meaning and purpose of the wealth tax and justified their support for or opposition to it. While the Social Democrats debate the wealth tax primarily from a social justice perspective, the Christian Democrats rely on an efficiency frame that invokes biological metaphors, enabling them to narrate the wealth tax as a threat to the social body. Paradoxically, then, by arguing that the tax is “poison to the economy”, conservative discourse succeeds in linking opposition to the wealth tax to a principle of social unity. On these grounds, we suggest that future research should scrutinize how the interrelation between political discourse and institutional architectures has facilitated the rise of wealth inequality in recent decades.

How Does a Net Wealth Tax Affect Overall Tax Collection?

How Does a Net Wealth Tax Affect Overall Tax Collection?

Saving Effects of a Real-Life Imperfectly Implemented Net Wealth Tax: Evidence from Norwegian Micro Data

Saving Effects of a Real-Life Imperfectly Implemented Net Wealth Tax: Evidence from Norwegian Micro Data

Globalization and the societal consensus of wealth tax cuts

ABSTRACT Wealth taxes are redistributive policies, which tap into the accumulation of wealth at the top. As the financial burden of these taxes affect a small elite, standard political science arguments suggest that they are popular instruments. Yet, democratic governments have increasingly cut wealth taxes. This paper sheds light on the reasons for their decline. It is the main argument that in the context of financial globalization not only right-wing but also left-wing governments cut wealth taxes as they undermine economic competitiveness, which is in the interest of the whole society. The societal consensus is particularly pronounced under corporatism, where capital and labour establish a reliable agreement not to tax wealth in return for long-term growth and employment. Based on a database for inheritance and net wealth taxes in up to 18 countries since 1970, the findings illustrate the emergence of a societal consensus of wealth tax cuts.

The historical origins of wealth taxation

ABSTRACT Which factors have driven wealth taxation over the long run of history? We look at a new dataset on the first permanent introduction of taxes on net wealth, i.e., recurrent taxes levied based on the absolute value of an individual’s financial assets, to answer this question. First, we place the introduction of wealth taxation in the historical genesis of the modern tax state. We find that recurrent taxes on net wealth are a more recent, yet less widely spread phenomenon than other progressive taxes. Second, we analyse the historical drivers of wealth taxation. In particular, we argue that the net wealth tax was mainly used as an ‘emergency tax’ when countries faced major shocks. Utilizing event history analyses, we compare the impact of two major types of shocks: wars and recessions. Our results show that wealth taxes were primarily introduced in the aftermath of major economic recessions, whilst wars do not speed up the uptake of wealth taxes. In contrast to other modern tax introductions, we do not find that countries are generally more likely to introduce wealth taxes as a result of broader societal change such as modernization or democratization.

Liquidity issues: solutions for the asset rich, cash poor

AbstractLiquidity concerns are oft raised when considering wealth taxes, yet the issue has received scant attention in the extant literature. In this paper we provide the first comprehensive review of the liquidity problem. Our aims are to estimate the scale of the problem, to explore the extent to which archetypal examples are at risk of experiencing low liquidity, and to review the policy options to reduce the scale and impact of liquidity challenges. Using data from Round 6 of the Wealth and Assets Survey, we demonstrate that the scale of the problem depends largely on conceptual and design issues. We find that farmers and business owners are commonly over‐represented in the low‐liquidity group, but there is little evidence to support the typical narrative surrounding single pensioners. Finally, we conclude our review with a number of preferred solutions to address liquidity issues, including recognising that a net wealth tax can be paid out of income or by sale of assets, by withholding tax (e.g. by pension providers), by borrowing/financing, deferred payment arrangements and, possibly in limited circumstances, payment in specie.

Behavioural responses to a wealth tax

AbstractIn this paper, we review the existing empirical evidence on how individuals respond to the incentives created by a net wealth tax. Variation in the overall magnitude of behavioural responses is substantial: estimates of the elasticity of taxable wealth vary by a factor of 800. We explore three key reasons for this variation: tax design, context and methodology. We then discuss what is known about the importance of individual margins of response and how these interact with policy choices. Finally, we use our analysis to systematically narrow down and reconcile the range of elasticity estimates. We argue that a well‐designed wealth tax would reduce the tax base by 7–17 per cent if levied at a tax rate of 1 per cent.

A Quantitative Assessment of the Net Wealth Tax: The Spanish Experience

Abstract There is growing debate, both social and academic, about the possibility of levying an annual net wealth tax. Until a few years ago, such a proposal appeared difficult to both implement and control, but recent technological innovations, which could greatly facilitate the periodic valuation of wealth, combined with improvements in international tax information sharing could make a “modern wealth tax” possible. Nonetheless, a number of challenges regarding its design still need to be addressed. Taking advantage of the Spanish experience—the only EU country to levy a wealth tax—we undertake a quantitative analysis of various key legal elements of the current tax (exemptions and the common income and wealth tax ceiling) by means of a tax simulator we have developed; we also analyze its redistributive power. Our results show that the family business exemption and the common ceilings are highly regressive. We also assess the effectiveness of alternative reforms with more comprehensive tax bases (JEL codes: H24, H23, and D31).

Public Support for Tax Policies in COVID-19 Times: Evidence from Luxembourg

We study attitudes towards the introduction of hypothetical new taxes to finance the cost of the COVID-19 pandemic. We rely on survey data collected in Luxembourg in 2020. The survey asks for the agreement of respondents over: a one-time net wealth tax, an inheritance tax, a temporary solidarity income tax, and a temporary increase in VAT. All questions include different and randomly assigned tax attributes (tax rates and exemption amounts). We find a clear divide with relatively high support for new wealth and inheritance taxes on the one hand and a low support for increases in VAT and income taxes on the other hand. While 58% of respondents agree or strongly agree with a one-time tax levied on net worth, only 24% are in favor of a small increase in VAT. Support for any tax is however negatively associated with the size of the tax as measured by the predicted revenues. Our results indicate that a one-time wealth tax could raise substantial revenues and still garner public support.

Policy Forum: The Case for an Annual Net Wealth Tax

The public and policy makers are showing a renewed interest in wealth taxes as a possible response to the problem of wealth inequality. This article describes the recent trend of rising wealth inequality, and the factors contributing to it, in developed countries, including Canada. The authors argue that an annual wealth tax could and should counter the trend, and that such a tax is both justifiable on economic grounds and technically feasible. They assert that the taxation of capital income does not adequately address the largely tax-free accumulation of large fortunes, and that an annual wealth tax is preferable to property taxes, which exclude the taxation of financial assets and are levied on gross rather than net wealth. The article responds in detail to major criticisms of an annual tax on wealth, arguing that such a tax is needed to achieve a more equal distribution of wealth while raising additional revenues.

Does the Wealth Tax Kill Jobs?

Fueled by increasing inequality and rising fiscal deficits, the interest in wealth taxation has increased over the last years, both in the public debate and in academia. Yet, knowledge about the behavioral effects of a wealth tax is limited. We utilize rich Norwegian register data and a series of tax reforms implemented between 2007 and 2017 to study how a net wealth tax imposed on owners of small and medium sized businesses affects their firms' investment and employment decisions. Identification of causal effects is based on a generalized difference-in-differences strategy. We find no empirical support for the claim that a moderate wealth tax adversely affects investments and employment in firms controlled by the taxpayers. To the contrary, our results indicate a positive causal relationship between the level of a household's wealth tax and subsequent employment growth in the firm it controls. The rationale behind this result appears to be that the tax value of a given wealth can be reduced by being invested in a non-traded firm, and that this incentive becomes stronger the higher is the wealth tax.

Over the Top: Why an Annual Wealth Tax for Canada is Unnecessary

The idea of a wealth tax has taken on new prominence since French economist Thomas Piketty famously proposed a global wealth tax in 2013; Senator Elizabeth Warren has even made a national wealth tax a plank in her campaign to become the Democratic presidential candidate in 2020. The current interest in wealth taxation is a response to the increase in wealth concentration and income inequality that has occurred in most OECD countries. It has been well documented that both income and wealth inequality have risen significantly in recent decades. In this Commentary, we critically evaluate the case for an annual wealth tax as part of Canada’s tax system. To do so, we review current received wisdom on the elements of a good tax system, drawing on the normative tax design literature and best practices. We do not address the issue of how responsive tax policy needs to be to deal with the evolving inequality of income and wealth. Our focus, instead, is on the mix of policy instruments that are most effective for whatever degree of responsiveness policymakers choose. Our argument is that wealth taxes add relatively little to the taxes on capital and capital income that are already in place, and that concerns about the social consequences of wealth concentration are better addressed by reform of existing capital income taxes and by considering wealth transfer (inheritance) taxation. Our argument against wealth taxation is over and above the substantial administrative challenges in measurement, collection and coverage for annual wealth taxes. These alone are enough to raise red flags about wealth taxation. For our part, we rely on the more fundamental argument that annual net wealth taxes are unnecessary since their objectives can be better achieved by suitably designed taxes on capital income and wealth transfers.