Wealth Taxation and Household Saving: Evidence from Assessment Discontinuities in Norway

Abstract

While it is common to assume that wealth taxation has a negative effect on household saving, neither theory nor existing empirical evidence lends clear support. Theoretically, the effect is ambiguous due to opposing income and substitution effects, and empirically, the effect is challenging to discern because of misreporting responses. Using geographic discontinuities in the Norwegian annual net-wealth tax and third-party reported data on savings, I find that wealth taxation causes households to save more, and that this increase in saving is primarily financed by increased labor earnings. These responses are the combination of small negative effects of increasing the marginal tax rates on wealth and relatively larger positive effects of increasing average rates. These findings imply that income effects may dominate substitution effects in household responses to rate-of-return shocks, which has important implications for both optimal taxation and macroeconomic modeling.

Keywords: Wealth Taxes, Savings, Capital Taxation, Intertemporal Substitution, Household Finance

JEL Classification: G51, D14, D15, H20, H31, E21, J22