Behavioral responses to wealth taxation: evidence from a Norwegian reform

Although only a few OECD countries currently apply progressive wealth taxes (Colombia, Norway, Spain, Switzerland), the academic and political debate on the complementary role of wealth taxation in order to level the playing field is gaining momentum.

Rigorous evidence of behavioural responses to wealth taxation remains however scant due to three reasons: (i) wealth tax is present only in a limited set of countries with high-quality data; (ii) within-country episodes of single-period reforms allowing credible identification are rare; and (iii) most reforms impact the top of the distribution where evasion is widespread.

In this paper, Roberto Iacono and Bård Smedsvik analyse the behavioural responses spurred by a unique municipal wealth tax reform in Norway. They exploit variation from a non-staggered municipal reform reducing the marginal tax rate (MTR) on wealth exclusively in the northern Norwegian municipality of Bø from 0.85% to 0.35%, from 1.1.2021. Mimicking the behaviour of a tax haven, Bø is the first municipality to unilaterally reduce the municipal wealth tax rate since the establishment of wealth taxation in Norway in 1892.

Key findings:

• There is a significant 66.6% increase in average taxable wealth in response to a 1 percentage point drop in the wealth tax rate. The elasticity of taxable wealth increases to 71.6% when focusing exclusively on wealth taxpayers. There is a significant but more modest 10.3% jump in the weighted mass of wealth taxpayers in the treated municipality.
• Non-real effects of the reform dominate: mobility of wealthy taxpayers appears as the major behavioural response to the change in the net tax rate, accounting for a staggering 79% of the post-treatment total net wealth in the treated municipality (up from 19% in the pre-reform period).
• These results emerge in a context with third-party reported wealth data with negligible measurement error, limited evidence of bunching, highly enforced residence-based wealth taxation, and a low degree of out-migration rates.
• The tax competition initiated in 2021 by the municipality of Bø can result in a potentially distortive race to the bottom in the municipal wealth tax rates. It might then be desirable to develop increased coordination between central and local authorities regarding wealth taxation, to minimize the scope for unhealthy competition by municipalities, resulting in tax optimization strategies by wealthy individuals.

AUTHORS

• Roberto Iacono, Norwegian University of Science and Technology (NTNU), LSE III.
• Bård Smedsvik, Norwegian University of Science and Technology (NTNU).

MEDIA CONTACT

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