Distributional Effects of a Wealth Tax under Lifetime‐Dynastic Income Concepts*

• Published date: 01 January 2021
• Author: Elin Halvorsen,Thor O. Thoresen
• Date: 01 January 2021
• DOI: http://doi.org/10.1111/sjoe.12392

Scand. J. of Economics 123(1), 184–215, 2021

DOI: 10.1111/sjoe.12392

Distributional Effects of a Wealth Tax under

Lifetime-Dynastic Income Concepts*

Elin Halvorsen

Statistics Norway,Oslo, Norway

elin.halvorsen@ssb.no

Thor O. Thoresen†

Statistics Norway,Oslo, Norway

thor.olav.thoresen@ssb.no

Abstract

Annual wealth tax is back on the policy agenda, but discussion of its effect is not wellinfor med.

When standard methodology is used and wealth-tax burdens are measured against annual

individualincome, it is found that a large share of the tax burden falls on people with lowincomes.

In this study, we use rich Norwegian administrative data to discuss the distributional effects of

wealthtax under several different income concepts, ultimately measuring income overthe lifetime

of family dynasties. When measured against lifetime income and lifetime income in dynasties,

wealth tax is mostly borne by high-income taxpayersand is seen as clearly redistributive.

Keywords: Dynastic income; life-cycle income; redistribution; wealth tax

JEL classif‌ication:D31; H24

I. Introduction

There is an ongoing global debate about how big the tax contribution

of the wealthy should be, and whether it should be increased. Over

the past few decades, until the f‌inancial crisis, recurrent taxes on net

wealth were in decline in many countries. Austria, Denmark, Finland,

Germany, Luxembourg, and Sweden had all repealed such taxes (F¨orster

*Financial support from the Norwegian Research Council (grant no. 217423) is gratefully

acknowledged.We thank Carol Romayfor assisting with the data work. Weare grateful for helpful

comments from Shaf‌ik Hebous, and participants at Skatteforum 2016 (Halden, Norway), the Oslo

Fiscal Studies internal seminar (2016), and the 2016 IIPF conference (Lake Tahoe,Nevada). The

micro data used in this study are derived from Norwegian administrative registers. Transfer of

personal data outside the country’s borders is not normally allowed. Researchers belonging to

Norwegian institutions can request access to the data used in this analysis through the standard

procedures of applying for data at Statistics Norway (http://www.ssb.no/en/omssb/tjenester-

og-verktoy/data-til-forskning). The authors are willing to assist with data application and to

share data code.

†Also aff‌iliated with Oslo Fiscal Studies, Department of Economics, University of Oslo.

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The editors of The Scandinavian Journal of Economics 2019.

E. Halvorsen and T. O. Thoresen 185

et al., 2014). Some of the few countries that still keep a tax on net

wealth are Norway, Spain, and Switzerland (at the cantonal level). More

recently, though, several OECD countries have either introduced or seriously

debated introducing such taxes, as higher wealth taxes are discussed as

tools to f‌inance public debt. For example, both Iceland and Spain recently

reintroduced wealth taxes as a temporary measure for f‌iscal consolidation

purposes. Although wealth tax was abolished in Spain in 2009, it was

reintroduced in 2012, and is still part of the tax schedule in 2020.1

The reintroduction of wealth taxation has been supported by important

contributors in the f‌ield; see, for example, Piketty et al. (2013), Piketty

(2014), and Atkinson (2015), who emphasize the role of wealth tax as a

distributive backstop mechanism. However, it is acknowledged that there

is little evidence as to how this type of taxation works (Kopczuk, 2013;

Br¨ulhart et al., 2019).2

Our aim in the present paper is to contribute to a more informed

discussion on the distributional effects of this type of taxation. Our point

of departure is that the redistributive properties of wealth tax are often

measured against annual individual income, and the main message is that

this practice provides inadequate information. The contribution of the paper

is to provide descriptions of how annual wealth tax is distributed for

a wide range of income concepts: annual household income, household

income over time (as observed in data), imputed lifetime income obtained

by employing models of labor and capital income, and lifetime income in

the family dynasty. We show how depictions of the distributive effects of

wealth tax for different income concepts deviate from results obtained by

using the conventional annual snapshot concept of income.

1Similarly,Iceland reintroduced a wealth-tax schedule in 2010, which lasted for four years.

2Wealth taxation is often associated with negative effects on capital accumulation and with

problematic compliance issues, as emphasized by Boadway et al. (2010) in their report for

the Mirrlees Review. The standard results that capital should not be taxed at all (Atkinson

and Stiglitz, 1976; Chamley, 1986; Judd, 1985) have recently been challenged, for example by

severalcontrib utions under “newdynamic public f‌inance” (see Kocherlakota, 2005; Albanesi and

Sleet, 2006; Golosov et al., 2013). The results of Guvenen et al. (2019) are particularly relevant,

given the present context, as they argue that, from an economic eff‌iciencypoint of view, wealth

taxation should replace capital income taxation, as the tax burden would shift from productive

to unproductive entrepreneurs if the capital income tax were to be replaced with a wealth tax. It

should also be noted that there seems to be a greater awareness of negativeexternalities coming

from wealth accumulation and control of resources in fewer hands, whichthe annual wealth tax

might counteract, as emphasized by Kopczuk (2013). For example, the saving behavior of the

wealthyis consistent with an interpretation of wealth as a source of utility in its own right (Carroll,

2000). However, power and status may be seen as ad hoc motives, and taxation on such grounds

might not be easily defended (Boadwayet al., 2010; Jacobs, 2013). See also discussions of wealth

taxation from a Scandinavian perspectivein Bastani and Waldenstr¨om (2018) and Jakobsen et al.

(2020).

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The editors of The Scandinavian Journal of Economics 2019.

186 Distributional effects of a wealth tax

We f‌ind that the Norwegian wealth tax (which is akin to a tax on

f‌inancial wealth only) has a distributional U-shape in annual income, as its

burden falls disproportionately more on taxpayers with very low income and

very high income, ref‌lecting an unclear association between annual income

and net worth. This is also seen in several other papers; see, for example,

Banks et al. (2003), J¨antti et al. (2008) and Cowell et al. (2017). In such

depictions, wealth tax is therefore not seen as delivering the anticipated

distributional effects, and similar f‌indings might have contributed to the

recent decline of this type of taxation in Europe.

Analysis of the distributional effects of wealth tax highlights the

def‌iciencies of using the annual income snapshot in studies of the

distribution of tax burdens. For example, the capital owner might be

positioned at the low end of the annual income distribution as a result

of temporary business losses (a “bad year”). In such cases, taxation of

wealth could be seen as an unacceptable burden for the asset owner as

the assets do not generate suff‌icient income in a single year to enable

the owner to pay an annual wealth tax on the capital (Boadway et al.,

2010). Liquidity problems are also emphasized by Bastani and Waldenstr¨om

(2018). However, this picture changes when we address household income

over a longer period of time, and when (ultimately) we use lifetime income

as the income concept: the burden of the wealth tax for low income levels

diminishes and moves to the top end of the distribution.

Furthermore, ignoring intergenerational links might be misleading in

the context of wealth-tax distribution. Parents can transfer wealth to their

children at an early stage of life, suggesting that wealth taxation falls

on people with temporary low ability-to-pay, as noted by Atkinson and

Harrison (1978). If we want to take a truly long-term view of wealth and

income inequality, we need to employ the family dynasty as the unit of

analysis (Becker and Tomes, 1979; Piketty, 2000; Cowell and Van Kerm,

2015; Kanbur and Stiglitz, 2016). We f‌ind that because of the relatively

high degree of intergenerational mobility in Norway, overall inequality

in dynastic-lifetime income, when measured across generations, is lower

than lifetime income. However, the overall result is that extending lifetime

income to family dynasty income does not change the depiction of the

distributional effect of wealth tax much, compared with what we see for

lifetime income only.

Measures of income based on these methodological ref‌inements are

obtained by means of access to data for the whole Norwegian population

aged over 19 years, from 1993 to 2011. These data are used to establish

alternative income concepts. To measure income over time, we use

information on observed income both directly and by employing the data to

establish a measure of lifetime income by estimating models of the income-

generating process over the life cycle, allowing lifetime labor income and

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The editors of The Scandinavian Journal of Economics 2019.