Why did other net wealth taxes fail and is this time different?

Abstract

Wealth taxes are increasingly being considered as an option in policy and academic circles to collect additional revenue and address inequality. One objection that is often raised, however, is that they seem to have failed in countries that tried them. Is that so and does that mean that wealth taxes should be abandoned as a policy tool? This paper gives an overview of OECD countries' experiences with wealth taxes and explores the different factors that have led to their repeal in most countries. The paper also discusses whether the situation might be different today and what the implications for tax policy might be.

Behavioural responses to a wealth tax

“…Recent studies have provided a small number of estimates of the taxable wealth elasticity (Seim, 2017;Zoutman, 2018;Durán-Cabré, Esteller-Moré, and Mas-Montserrat, 2019;Jakobsen et al, 2019;Agrawal, Foremny and Martinez-Toledano, 2020;Londoño-Velez and Ávila-Mahecha, 2020;Ring, 2020). However, elasticities are not structural parameters, they vary across contexts and are sensitive to policy choices which are highly heterogeneous across countries (see Perret, 2020). Slemrod and Kopczuk (2002) formalise the idea that elasticities can, in effect, be chosen by policy makers.…”

“…Individuals unwilling or unable to avoid wealth taxation through reallocation within the household might instead minimise their tax liability by reallocating their wealth across different asset classes. Erosion of the tax base through asset composition responses, generally arising due to the tax base being narrowed by exemptions and reliefs, contributed to the arguments for repealing wealth taxation in several OECD countries (see Perret, 2020). Findings of portfolio composition responses to tax incentives are common, not only in the wealth tax literature, focused on taxes on the stock of wealth (Alvaredo and Saez, 2009;Durán-Cabré, Esteller-Moré, and Mas-Montserrat, 2019;Ring, 2020;Zoutman, 2015), but also with regards to estate taxation -taxes on the transfers of wealth at death (Kopczuk, 2007;Poterba and Weisbenner, 2003), and capital income taxation -taxes on the returns from wealth (Alan et al, 2010;King and Leape, 1998;Poterba and Samwick, 2003).…”

“…Given limited opportunities to adjust the structure of asset holdings to avoid a wealth tax, individuals may, instead, adjust the total value of their asset holdings. The argument that wealth taxation reduces the incentive to save has played a role in the decline in wealth taxes in OECD countries (see Perret, 2020). As the theoretical argument goes, the imposition of a tax on wealth reduces the return on saving, encouraging individuals to spend more (or work less) today, and put less aside for the future.…”

“…The emigration of wealthy individuals is commonly regarded as a threat to efforts to tax wealth, especially in an age of increasing globalisation and high-skilled mobility. This argument has contributed to the decline of wealth taxes in OECD countries (Perret, 2020). Wealth taxation may also put off wealthy foreigners from moving to the UK, with broader economic implications.…”

One-off wealth taxes: theory and evidence

“…To begin with, it is far from clear whether the analogy to monetary policy holds, because it is far from clear that democratic governments face an incentive to tax wealthy people. While in theory redistributive taxes should be favoured by rational median voters, as the recent history of wealth taxes reveals, tax rises -even tax rises on the wealthy -are often unpopular, and democratically-elected governments often face pressures to cut rather than raise taxes (Graetz and Shapiro, 2011;Perret, 2020). Even where people claim they are in favour of taxing the rich, their voting behaviours suggest that they are concerned about the broader economic implications of such policies.…”