Working Paper: CEPR ID: DP12780
Authors: Katrine Jakobsen; Kristian Jakobsen; Henrik Kleven; Gabriel Zucman
Abstract: Using administrative wealth records from Denmark, we study the effects of wealth taxes on wealth accumulation. Denmark used to impose one of the world’s highest marginal tax rates on wealth, but this tax was drastically reduced and ultimately abolished between 1989 and 1997. Due to the specific design of the wealth tax, these changes provide a compelling quasi- experiment for understanding behavioral responses among the wealthiest segments of the population. We find clear reduced-form effects of wealth taxes in the short and medium run, with larger effects on the very wealthy than on the moderately wealthy. We develop a simple lifecycle model with utility of residual wealth (bequests) allowing us to interpret the evidence in terms of structural primitives. We calibrate the model to the quasi-experimental moments and simulate the model forward to estimate the long-run effect of wealth taxes on wealth accumulation. Our simulations show that the long-run elasticity of wealth with respect to the net-of-tax return is sizeable at the top of distribution. Our paper provides the type of evidence needed to assess optimal capital taxation.
Keywords: wealth taxation; wealth accumulation; Denmark
JEL Codes: E2; E6; H2; H3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in taxable wealth among the very wealthy (H24) | Increased savings and wealth accumulation (G51) |
| Increase in taxable wealth among the very wealthy (H24) | Increased after-tax returns on wealth (G59) |
| Long-run elasticity of wealth with respect to the net-of-tax return (H31) | Substantial increase in wealth at the top of the wealth distribution (D31) |
| Reduction of the wealth tax in Denmark (H29) | Increase in taxable wealth among the very wealthy (H24) |
| Doubled exemption threshold (H31) | Increase in taxable wealth among moderately wealthy couples (H31) |