Wealth tax linked to increased savings, study finds

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Uncle Sam is chronically running trillions of dollars in deficits, so one proposal to raise revenue is to tax the wealthiest Americans on their accumulated assets rather than their annual income. That is what it is.
Sen. Elizabeth Warren (D-Mass.) has introduced a version of a wealth tax that would impose a 2% tax on net worth over $50 million and 3% on net worth over $1 billion. But the bill has never been voted on, and critics say it would reduce gross domestic product (GDP) in part because people would be less willing to save money.
But a new study from Texas McCombs questions whether a wealth tax would reduce savings. Marius Ring, assistant professor of finance, investigates the real-world impact of a wealth tax in Norway, one of the few countries that currently has one.
Surprisingly, he found that taxes seem to incentivize people to save more.
The results of this research will be published in the academic journal “Review of Economic Studies.”
“Wealth taxes don’t seem to reduce the amount people save,” Ring said. “Taxing someone’s savings doesn’t necessarily mean they save less.”
Norway imposes a 1% tax on assets over $160,000, affecting 15% of taxpayers. Ring looked at geographic differences in how taxes were assessed from 2005 to 2015. He linked that information with third-party data such as household savings, home characteristics and transaction prices. He discovered:
For every additional Norwegian krone (NOK) in wealth tax payments, household net savings increased by 3.76 NOK each year. These savings came primarily from working more, rather than consuming less.
According to Ring, people work more because they don’t want to plan for future consumption less. Economists refer to this as the income effect, because an increase in income leads to an increase in consumption.
“It has to do with how unpleasant the downward adjustment in consumption is,” he says. “If you have your eyes set on a specific type of RV to purchase for retirement, you need to save more. To save more, it may be less painful to work more than to spend less.” No.”
People don’t necessarily work long hours, he added. Instead, they stay in the workforce longer and then retire.
In addition to increased savings, the wealth tax hike had no effect on people’s portfolio allocation. People who receive large amounts of tax money set aside the same portion of their financial assets to invest in the stock market.
Ring said his focus was primarily on the moderately wealthy, or those in the 85th to 90th percentile of the wealth distribution. But he doubts the ultra-rich would react differently to a wealth tax. In fact, he argues, you might be able to save more if you’re more interested in growing your wealth than using it, such as building a bigger business empire.
He emphasized that he was not making policy recommendations for or against a wealth tax. He’s just evaluating one of the arguments against it by showing that it doesn’t necessarily discourage saving.
The broader implications of his findings, he says, lie in the design of ideal tax systems. Economists generally prefer taxes that are less distortionary, that is, have less influence on people’s behavior.
Ring’s findings suggest that wealth taxes could be such a tax, but so could other types of taxes on savings, such as taxes on dividends and capital gains. There is.
“My findings suggest that a wealth tax could fit the bill,” he says. “But they don’t necessarily support wealth taxes over other types of taxes on household assets.”
Further information: Marius AK Ring, Wealth Taxes and Household Savings: Evidence from Valuation Discontinuities in Norway, Review of Economic Research (2024). DOI: 10.1093/restud/rdae100
Provided by the University of Texas at Austin
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