New Research Challenges The Idea That Wealth Taxes Decrease Savings
As officials toss around ideas to help increase revenue, one proposal has stood out from the rest. By taxing the wealthiest Americans on their accumulated wealth, more money can be raised.
A version of this wealth tax was introduced by U.S. Senator Elizabeth Warren, which would tax net worth over $50 million at two percent and net worth over $1 billion at three percent.
However, it has not yet come to a vote. Critics say that the wealth tax would reduce gross domestic product, partly by lowering people’s incentives to save money. But recent research from the University of Texas at Austin challenges the idea that wealth taxes decrease savings.
In a new study, researchers investigated the effects of a wealth tax in Norway, one of the only countries that currently has one implemented. Their findings showed that the tax actually motivated people to save more money.
“Wealth taxation does not seem to reduce how much people save,” said Marius Ring, an assistant professor of finance. “Taxing someone’s savings doesn’t necessarily imply that they will want to save less.”
Norway imposes a tax on wealth exceeding $160,000, impacting 15 percent of taxpayers. The researchers analyzed geographic variations in how the tax was assessed between 2005 and 2015.
They then compared the information with external data like household savings, property features, and transaction prices.
They found that for every additional Norwegian Krone (NOK) paid out in wealth taxes, households increased their net savings by 3.76 NOK per year. The savings were mostly the result of working more rather than spending less.
According to Ring, people work more because they want to maintain their plans for future spending. Economists refer to this as the income effect, where greater income drives greater consumption.
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“It relates to how downward adjustment of consumption is unpleasant,” Ring said. “If I have my eyes set on a certain type of RV to buy at retirement, then I’ll have to save more. It might be less painful to work more than to consume less in order to increase my savings.”
People may not work longer hours, but they might stay in the workforce for longer and retire later. Aside from increasing savings, higher wealth taxes did not affect people’s financial portfolios. They were able to save the same fractions of their wealth to invest in the stock market.
For the study, Ring looked at the moderately wealthy, which referred to people in the 85th and 90th percentile of wealth distribution.
It is unlikely that the ultra-rich would respond differently to a wealth tax. They would probably save even more money.
Overall, the findings demonstrate that a wealth tax does not always discourage saving. In fact, it could even encourage it.
The study was published in the Review of Economic Studies.
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