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

Abstract

Neither theory nor existing empirical evidence support the notion that wealth taxation reduces saving. Theoretically, the effect is ambiguous due to opposing income and substitution effects, and empirically, the effect may be confounded by 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. Each additional NOK of wealth tax increases annual net financial saving by 3.76, implying that households increase saving enough to offset both current and future wealth taxes. The increase in financial saving is primarily financed by extensive-margin labor supply responses. These responses are the combination of small negative effects of increasing the marginal tax rates on wealth and 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 JEL: G51, D14, D15, H20, H31, E21, J22

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