Hugo Reis
Pedro Carneiro
Raul Santaeulalia-Llopis
Diego Restuccia
Chaoran Chen
Brad J. Hershbein
Claudia Macaluso
Chen Yeh
Xuan Tam
Xin Tang
Marina M. Tavares
Adrian Peralta-Alva
Carlos Carillo-Tudela
Felix Koenig
Joze Sambt
Ronald Lee
James Sefton
David McCarthy
Bledi Taska
Carter Braxton
Alp Simsek
Plamen T. Nenov
Gabriel Chodorow-Reich
Virgiliu Midrigan
Corina Boar
Sauro Mocetti
Guglielmo Barone
Steven J. Davis
Nicholas Bloom
José María Barrero
Thomas Sampson
Adrien Matray
Natalie Bau
Darryl Koehler
Laurence J. Kotlikoff
Alan J. Auerbach
Irina Popova
Alexander Ludwig
Dirk Krueger
Nicola Fuchs-Schündeln
Taylor Jaworski
Walker Hanlon
Ludo Visschers
Carlos Carillo-Tudela
Henrik Kleven
Kristian Jakobsen
Katrine Marie Jakobsen
Alessandro Guarnieri
Tanguy van Ypersele
Fabien Petit
Cecilia García-Peñalosa
Yonatan Berman
Nina Weber
Julian Limberg
David Hope
Pedro Tremacoldi-Rossi
Tatiana Mocanu
Marco Ranaldi
Silvia Vannutelli
Raymond Fisman
John Voorheis
Reed Walker
Janet Currie
Roel Dom
Marcos Vera-Hernández
Emla Fitzsimons
José V. Rodríguez Mora
Tomasa Rodrigo
Álvaro Ortiz
Stephen Hansen
Vasco Carvalho
Gergely Buda
Gabriel Zucman
Anders Jensen
Matthew Fisher-Post
José-Alberto Guerra
Myra Mohnen
Christopher Timmins
Ignacio Sarmiento-Barbieri
Peter Christensen
Linda Wu
Gaurav Khatri
Julián Costas-Fernández
Eleonora Patacchini
Jorgen Harris
Marco Battaglini
Ricardo Fernholz
Alberto Bisin
Jess Benhabib
Cian Ruane
Pete Klenow
Mark Bils
Peter Hull
Will Dobbie
David Arnold
Eric Zwick
Owen Zidar
Matt Smith
Ansgar Walther
Tarun Ramadorai

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.

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.

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.

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.

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.

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.

About the authors

Katrine Marie Jakobsen
Kristian Jakobsen

Chief Economist and Vice President, Tænketanken DEA.

Kristian Jakobsen

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