Wealth taxation and wealth accumulation: theory and evidence from Denmark

What is this research about and why did you do it?

This paper investigates the effects of wealth taxes on wealth accumulation, combining administrative data on wealth in Denmark and a theoretical life-cycle model of wealth accumulation.

This study is motivated by three gaps in the literature: (i) how taxes influence capital supply (ii) the impacts of wealth taxes at the top of the wealth distribution (iii) long-run effects of capital taxes. This research aims to address these and provide new insights on the desirability of wealth taxes.

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How did you answer this question?

Reforms to wealth taxation in Denmark from 1989 to 1997 provide exogenous variation from which to estimate short- and medium-term impacts of wealth taxes on wealth accumulation. Differential tax rates for couples and singles between the 98th and 99th percentile of the wealth distribution allow for difference-in-differences estimation of the effects on the moderately wealthy. Wealth tax exemptions of some households in the top 1% of the distribution facilitate similar identification for very wealthy households.

A life-cycle model is developed to understand the effects of wealth tax cuts on taxable wealth, incorporating two main mechanisms: the mechanical rise in wealth arising from lower tax obligations and the behavioural rise in wealth from changes to household consumption and savings behaviour. Fitting model parameters in line with difference-in-differences results allows for extrapolation of future trends in wealth, and hence the inference of long-term effects of wealth taxes.

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What did you find?

The difference-in-differences design shows a positive impact on wealth tax rate reduction on wealth accumulation for both moderately wealthy and very wealthy households. This effect is stronger for the very wealthy than the moderately wealthy. Simulations using the theoretical model, with parameters calibrated to match quasi-experimental results, predict that the wealth tax cut increased taxable wealth of very wealthy and moderately wealthy households by 65 and 30% respectively over 30 years. The behavioural channel is found to dominate the mechanical channel in both household types. This is particularly true for the moderately wealthy.

This figure shows the long-run effects of wealth tax cuts when calibrating the model to couples and using a difference-in-differences approach (comparing couples and singles in the exempted range). These are effects for the moderately wealthy (between the 98th and 99th percentile cutoffs). The reform experiment cuts the wealth tax rate by 1 percentage point, corresponding to the differential tax cut between the treatment and control groups. Panel A shows the observed life cycle profile of wealth, the simulated life cycle profile before the reform (calibrated to fit the empirical profile), and the simulated life cycle profile after the reform. Panel B illustrates the total effects, the mechanical effects, and the behavioral effects on taxable wealth over 30 years, demonstrating that the model matches the quasi-experimental estimates over the initial 8 years.

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What implications does this have for the research on wealth concentration or economic inequality?

This paper provides the first estimate of the long-run elasticity of capital supply with respect to capital taxes. Saez and Stantcheva (2018) show that this statistic determines the optimal capital tax, highlighting the implications of this paper for tax design. Further, identified differences in the effects of wealth taxes between very wealthy and moderately wealthy households highlight the need for focussed study of the top of the wealth distribution – a facet neglected in previous research.

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What are the next steps in your research agenda?

Future work will investigate other margins of responses to wealth taxes, including tax evasion, career choice, and entrepreneurship.

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Citation and related resources

This paper can be cited as follows: Jakobsen, K., Jakobsen, K., Kleven, H., and Zucman, G. (2020). 'Wealth taxation and wealth accumulation: theory and evidence from Denmark.' Quarterly Journal of Economics 135(1), pp. 329-388.