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New Evidence for the Debate on Wealth Taxation

Alternative title: New Evidence for the Debate on Wealth Taxation

Awarded: NOK 3.0 mill.

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2018 - 2022

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Review of 5 papers 1. Wealth Taxation and Household Saving: Evidence from Assessment Discontinuities in Norway a. We use a quasi-experiment in Norway to examine how households respond to capital taxation. The introduction of a new wealth assessment methodology in 2010 led to geographic discontinuities in household exposure to wealth taxes, along both the extensive and intensive margins. We exploit this novel variation using a Boundary Discontinuity approach. We find that exposure to wealth taxes has a positive effect on both saving and labor earnings. These responses are the combination of small negative effects of increasing the marginal tax rates on wealth and relatively larger positive effects of increasing average tax rates. These results imply that income effects may dominate substitution effects in household responses to rate of return shocks, which has important implications for both optimal capital taxation and macroeconomic modeling. b. This paper is currently under review in an international journal. 2. Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash a. We provide evidence that adverse shocks to the wealth of business owners during the Financial Crisis had large effects on their firms' financing, employment, and investment. We use individual-level portfolio data from Norway to exploit the dispersion in stock returns during 2008-09 as a source of exogenous variation in entrepreneurs' wealth. We then trace out the effects of these shocks to the entrepreneurs' privately-held firms. We find that the adverse employment and investment effects are primarily driven by young firms who obtain considerably less bank financing following an owner wealth shock. Firms adjust employment primarily through hiring less, rather than firing, consistent with firms providing extensive-margin insurance for existing workers. These findings provide a causal link between asset price shocks and the real economy, important for implications of wealth taxation. b. This paper is currently being revised for resubmission to the Journal of Finance. 3. A wealth tax at work a. Over the past decade, the question of whether and how to tax household wealth has risen to the forefront of policy debates across the world. Norway belongs to only a handful of countries that (still) levy an annual net wealth tax. This paper reviews the case for wealth taxation, exploiting rich Norwegian administrative data. We discuss how the taxation of wealth fits in with the personal income tax. We further investigate the redistributional effects of wealth taxation and explore the extent to which wealth taxation may cause adverse liquidity effects for private firms. Finally, we consider the effects of wealth taxation on charitable giving. Taken together, we see the evidence presented here as not weakening the case for upholding the tax: we find favorable distributional effects and the efficiency losses appear to be limited. b. This paper is currently under review in an international journal. 4. Wealth Taxation and Charitable Giving a. The role of tax incentives in charitable giving has seen considerable attention. Yet, attention is limited to direct tax incentives, such as tax deductibility. Whether and how taxing household savings affects giving is largely unexplored. While theory suggests a link between capital taxation and giving, the sign of the effect is ambiguous due to opposing income and substitution effects. Our paper presents new evidence on the linkages between capital taxation and charitable giving on three fronts. First, we use quasi-experimental variation in the annual Norwegian wealth tax, and find a statistically significant negative, but modest, effect on how much households give. Second, we use a tax-exemption threshold for giving to estimate a modest own-price elasticity of giving. Third, we show that households who pay a wealth tax are more price elastic. b. This paper is posted as a working paper on SSRN and is currently being revised for working paper distribution with CESifo. 5. The Risk Premium and Portfolio Allocation: Evidence from Differential Wealth Taxation a. a. Standard portfolio theory posits a strong positive relationship between risky asset allocation and the risk premium. The theoretical strength of this relationship is highly at odds with empirical evidence based on beliefs elicited in surveys. We provide new evidence using quasi-experimental variation in the risk premium arising from differential taxation of risky and risk-free household wealth. Our findings indicate a strong positive relationship between the equity premium and the risky portfolio share, consistent with canonical models. A 0.3 percentage point reduction in the risk premium lowers the share of financial wealth allocated to stocks by 4 percentage points within 6 years, which can be rationalized by a coefficient of risk aversion below 2. b. The paper will soon be out as working paper.

Resultatene fra dette prosjektet er viktige for debatten om formuesskatt i Norge og internasjonalt. Hovedfunnene har vært formidlet i en kronikk i Aftenposten 8. august, 2021 (Hvordan virker formuesskatten). Dessuten holdt prosjektleder et foredrag på Skatteøkonomisk avdelings årlige seminar 28. september, 2021, med tittelen "En vurdering av formuesskatten".

The project is motivated by the current discussion of capital taxation as a potential policy tool to mitigate economic inequality and a need to finance government deficits in many countries, as well as the continued debate on whether Norway should continue its wealth tax. We do so by constructing a team of Norwegian and international researchers to address the following questions using Norwegian micro data: (1) How do wealth taxes affect individuals' ability to finance investment in their own firm? (2) How do changes to the liquidity of investors in private firms' affect employment? (3) Do wealth taxes distort the allocation of household savings away from businesses? (4) Can wealth alleviate financial constraints in entrepreneurship, and what does that teach us about potential effects of wealth redistribution on entrepreneurship? (5) Do wealth taxes affect charitable giving? (6) What are the patterns of charitable giving in Norway, and how does this change with wealth? (7) How does capital taxation affect the heterogeneity in returns to wealth and what is the "optimal" mix of capital taxation? Our projects will use econometric techniques to test and investigate theoretical predictions of the economic consequences of capital taxation, using variations tax rates in Norway, thereby offering results particularly relevant to the evaluation of Norwegian tax policy. Although the analysis is based on Norway, results will have broad international validity, given that taxation of wealth is back on the tax policy agenda. Norway is in this sense a unique setting since it already levies both taxes, and has the richness of data necessary to study these important questions.

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