Paraísos Fiscales, Wealth Taxation, and Mobility
In this paper, David R. Agrawal, Dirk Foremny, and Clara Martínez-Toledano analyze the effect of wealth taxation on mobility and the consequences for tax revenue and wealth inequality. The authors exploit the unique decentralization of the Spanish wealth tax system in 2011—after which all regions levied positive tax rates except for Madrid—using linked administrative wealth and income tax records. The authors find that five years after the reform, the stock of wealthy individuals in the region of Madrid increases by 10% relative to other regions, while smaller tax differentials between other regions do not matter for mobility. The authors rationalize the authors findings with a theoretical model of evasion and migration, which suggests that evasion is the mechanism most consistent with all of the mobility response being driven by the paraíso fiscal. Combining the new subnational wealth inequality series with the authors estimated elasticities, the authors show that Madrid’s status as a tax haven reduces the effectiveness of raising tax revenue and exacerbates regional wealth inequalities.
- Five years after the reform, the stock of wealthy individuals in the region of Madrid increases by 10% relative to other regions, while smaller tax differentials between other regions do not matter for mobility. (Figure 5a)
- Spain foregoes on average 5% of total wealth tax revenue due to tax-induced mobility, with substantial differences in how these losses are distributed across regions. (Figure 11)
- The mobility of wealthy taxpayers to Madrid has led to a rise in wealth concentration in the region. Between 2010 and 2015, the top 1% wealth share growth rate in Madrid, 16%, was almost double the growth rate had tax-induced mobility not existed, 8.7%. (Figure 14)
Figure- Paraísos Fiscales, Wealth Taxation, and Mobility
This figure shows the effect of wealth taxation on mobility and the consequences for tax revenue and wealth inequality through an event study of the number of individuals in Madrid, in 2010.
The authors’ results have important implications for the current academic and policy discussions on whether or not to introduce wealth taxes (e.g., California’s wealth tax proposal, the Warren and Sanders wealth taxes, the European wealth tax proposal to fund the COVID-19 response, etc.) and if so, how to design the tax and improve enforcement. Although the authors estimates suggest that decentralized wealth taxation is possible in the short-run, the case of decentralized taxation in Spain falls victim to the presence of a zero-tax region. Although a centralized tax would be subject to mobility opportunities external to the country, it could be coupled with more aggressive enforcement mechanisms. As an alternative to centralization, the authors results show that any coordinated tax schedule that will have the political support of all regions must be at a tax rate sufficiently close to the maximum rate. At the same time, the adoption of a minimum tax rate substantially limits the mobility effects due to decentralized taxation. Absent a political consensus to harmonizes the wealth tax, appropriate enforcement measures must be in place: centrally imposed minimum tax rates, increased auditing and information sharing between the central and regional governments, or the taxation of immobile assets such as land according to the source-principle.
- David R. Agrawal (University of Kentucky, CESifo): firstname.lastname@example.org
- Dirk Foremny (Universitat de Barcelona, Institut d’Economia de Barcelona, CESifo): email@example.com
- Clara Martínez-Toledano (Imperial College London, WIL): firstname.lastname@example.org
- Olivia Ronsain: email@example.com; +33 7 63 91 81 68