Behavioural responses to a wealth tax

Abstract

In 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% if levied at a tax rate of 1%.

Wealth taxes and devolution

“…The authors find that, of the 40.6% aggregate difference, 17 percentage points can be attributed to internal migration and a further 8 percentage points can be attributed to higher property values (which are directly related to migration). In sum (and as discussed further in Advani and Tarrant, 2020), this implies that 34% of the response to differences in wealth tax is induced by intra-national mobility.…”

“…At this stage however, it is difficult to come to firm conclusions on what the behavioural response to within-UK differences in wealth taxation would be, reiterating the conclusion of Advani and Tarrant (2020) in the context of the UK-wealth tax more generally. It is also too early to say whether there has been any significant migratory response to higher rates of income tax in Scotland.…”

Revenue and distributional modelling for a wealth tax

“…As outlined in Advani and Tarrant (2020), a net wealth tax is likely to elicit a number of avoidance and evasion responses, including underreporting, offshore evasion, gifting and fragmentation, asset portfolio recomposition, saving responses, labour supply responses, and migration. Advani and Tarrant (2020) conclude that under a well-designed wealth tax covering all asset classes -as we assume ours will -the overall magnitude of behavioural responses could be limited to a 7-17% reduction in wealth in response to a 1% tax rate on wealth. In our revenue modelling, we take the upper bound as the 'high avoidance' scenario, and the lower bound as the 'low avoidance' scenario.…”

One-off wealth taxes: theory and evidence

“…In contrast to a credible one-off wealth tax, a recurring wealth tax could have a far larger impact on the behaviour of taxpayers. In order to minimise their wealth tax liabilities, wealthy individuals might opt to alter the composition or location of their asset holdings, to consume rather than to save and invest, to exploit exemptions and evasion opportunities, or simply to emigrate (Adam and Miller, 2020;Advani and Tarrant, 2020). Admittedly, many (though not all) of these problems could be mitigated by a well-designed tax -for example, one with a global approach to taxable asset wealth, sensible residence definitions and suitable exit provisions (Chamberlain, 2020).…”