Home Featured William Watson: Wealth taxes have a much bigger effect on people’s behaviour than we thought

William Watson: Wealth taxes have a much bigger effect on people’s behaviour than we thought

by admin2 admin2
11 views
William Watson: Wealth taxes have a much bigger effect on people’s behaviour than we thought

Things are suspiciously quiet in Ottawa. High-priced help presumably is working through the different party platforms, seeing which measures the Liberals ran on were favoured by other parties too, making them candidates for revolving coalition-partner-of-the-month.

The Liberals didn’t actually propose a wealth tax. But wealth taxes are all the rage among progressives now, what with Sen. Elizabeth Warren edging ahead in the Democratic presidential race. She proposes a wealth tax of two per cent on net worth over US$50 million, rising to six per cent over US$1 billion. Sen. Warren is not a potential coalition partner for Justin Trudeau, of course, but Jagmeet Singh is and the NDP’s platform proposed a wealth tax of one per cent on “wealth” —presumably net worth — over C$20 million, which is US$15.2 million.

Being ahead a year out from the presidential election doesn’t mean much, of course. Both Bill Clinton and Barack Obama trailed in 1991 and 2007, respectively. But if Sen. Warren continues to do well, her wealth tax will become that much more attractive to progressives, even Canadian progressives, who may profess disdain for most things American but never fail to follow the latest U.S. fad. So don’t bet against a wealth tax here.

One argument against it is that it’s not fair to tax the same income twice — once when it’s earned and then again after it has been saved. But we’re talking rich people here so fairness won’t figure much in the debate. Whether a wealth tax will work may, however, though given the fervency of many of its proponents even that’s questionable. But if facts do end up mattering, a new study of wealth taxation where it’s practiced most — Switzerland — suggests it has much bigger effects on people’s behaviour than even its toughest critics have argued.

The study is by two economists from the University of Lausanne, one from the University of Basel and Jonathan Gruber of MIT, best known for having helped design Obamacare. In 2015, wealth taxes raised more than three per cent of Swiss public revenues. They’re imposed at the level of the canton, vary a lot across the 26 cantons (from 0.127 per cent to 1.005 per cent in the period studied), and have been changing in recent years — mainly declining — all of which is handy for researchers trying to judge their effects.

The study looks at the 20 biggest tax changes across cantons between 2003 and 2015 and it also examines the effects of a kind of natural experiment when in 2009 the cantons of Lucerne and Bern both cut their wealth taxes, Lucerne by a lot and Bern by just a bit. In the Lucerne-Bern comparison the researchers have access to “the universe of individual-level tax records,” that is, everybody’s tax file, albeit “anonymized.”

Looking across all 26 cantons, the tax cuts examined were on the order of 0.15-0.20 percentage points, which was big in relative terms, given an average rate of wealth tax of 0.53 per cent. Still, it’s small compared to the 1.0 to 6.0 per cent the NDP and Sen. Warren have in mind. Even so, the average effect on the wealth declared by taxpayers was greater than 40 per cent. A seemingly small change in wealth taxation gave rise to a big jump in the wealth citizens reported to the tax authorities. The effect likely would be symmetric if taxes were going up instead of down: big reductions in self-declared wealth.

The Lucerne-Bern comparison lets the researchers look a little more closely at what’s going on. Are there real effects on wealth in response to the lower wealth tax? Or is it simply a case of taxpayers deciding that with tax rates lower it’s no longer so costly to declare wealth they previously had told white lies about? (That there’s a non-random bunching of declared amounts just below various tax thresholds suggests white-lying is a big problem.)

Declared wealth in Lucerne grew 40.6 per cent more than in Bern following the 2009 tax cut. Part of that was mechanical: with less wealth being taxed away, taxpayers had more to declare. Another part of it — about a quarter — was due to wealth-owners moving to Lucerne, both from other parts of Switzerland and from abroad (in a ratio of about two to one, domestic to foreign). Another part — about a seventh — was from induced saving. And, finally, regarding what’s left, “the natural conclusion is that more than 40 per cent of the aggregate response (was) due to declarations of previously hidden assets … not disclosed as such to the tax authority.”

All this is from a reduction in the top rate of wealth tax from 0.56 per cent to 0.28 per cent. Canada and the U.S. aren’t Switzerland. But it would be foolish to ignore the possibility that wealth taxes could have much bigger effects than even their most candid proponents concede.

Financial Post

You may also like

Leave a Comment