Taxing wealth: reporting requirements and enforcement are as important as the tax rates

Over the last decades, there has been extensive research on the behavioral responses to taxes. This empirically-grounded research is crucial for informing the public debate about optimal tax policy, including the feasibility and desirability of taxing wealth.

Policy choices such as the stringency of reporting requirements and enforcement can make tax bases more or less elastic. Because these tax design features vary over time and across countries, it is challenging to generalize elasticities estimated in specific contexts to others. To address this limitation, it would be valuable to isolate the causal effect of key tax design features on behavior, but this task is difficult for several reasons. First, sharp or fundamental changes in tax design occur less frequently than changes in tax rates. Second, when they do occur, they are often paired with tax rate changes, complicating the identification of causal effects. Third, when it comes to the design of wealth taxation, only few countries tax wealth and collect individual-level administrative wealth data.

Bertrand Garbinti, Jonathan Goupille-Lebret, Mathilde Muñoz, Stefanie Stantcheva and Gabriel Zucman tackle these challenges and provide evidence on the effects of changes in information reporting requirements — a key dimension of tax design—on taxpayer behavior. Using exhaustive administrative wealth and income tax data, they study the 2011 French wealth tax reform that scaled back information reporting requirements below a certain wealth threshold. They develop a dynamic bunching approach that permits estimating the average response to the reform, the share of compliers, and the LATE.

Key findings:

• Reported wealth declines sharply in response to the reform and annual wealth growth rates are on average 20% lower among affected taxpayers.
• This decline appears due to increased evasion facilitated by the lower reporting requirements, as suggested by the fall in self-reported wealth but the lack of response in third-party-reported labor and capital incomes.
• By contrast, the estimated elasticities to tax rates are very small and insignificant. This illustrates the critical role of information reporting policies in shaping taxpayers’ behavior. Tax design matter as much, if not more, than discussing the tax rates.
• Poor tax design choices also have immediate implications for tax enforcement. If taxpayers under-report their wealth in lower reporting environments, this in turn can lead to a deterioration in the information and hence enforcement capacity of tax authorities.
• If specific design choices can contribute to increasing tax elasticities, other choices can contribute to reducing them, such as mandating pre-populated returns, collecting and using information automatically transmitted by domestic and foreign third parties, or taxing non-residents. A full cost-benefit analysis of different elasticity-reducing design features of income and wealth taxes constitutes a fruitful avenue for future research.

AUTHORS

• Bertrand GARBINTI, CREST-ENSAE-IP Paris, CEPR, WIL
• Jonathan GOUPILLE-LEBRET, CNRS, ENS Lyon,CEPR, CESifo, WIL
• Mathilde MUÑOZ, UC Berkeley, NBER and CEPR, WIL
• Stefanie STANTCHEVA, Harvard, NBER, and CEPR, WIL
• Gabriel ZUCMAN, Paris School of Economics, UC Berkeley, NBER, CEPR, EUTO

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