Amid growing discussions on wealth inequality and U.S. budget deficits, taxing accumulated wealth—rather than yearly income—has emerged as a potential revenue solution. U.S. Senator Elizabeth Warren proposed a wealth tax targeting net worth over $50 million at 2% and over $1 billion at 3%. Critics argue such taxes could harm economic growth by discouraging savings.
However, recent research from Texas McCombs challenges this notion by examining the real-world effects of wealth taxes in Norway, one of the few countries with an active wealth tax. Surprisingly, the study finds that wealth taxes may encourage people to save more, rather than less.
Wealth Taxes in Practice: Insights from Norway
Norway imposes a 1% tax on wealth exceeding $160,000, affecting 15% of taxpayers. An analysis of geographic differences in tax assessment from 2005 to 2015, combined with data on household savings and financial behavior, revealed intriguing patterns:
- For every additional Norwegian Krone (NOK) paid in wealth taxes, households increased their net savings by 3.76 NOK annually.
- These savings primarily stemmed from working more, rather than reducing consumption.
This phenomenon, known as the income effect, suggests that people work harder to maintain future consumption goals rather than cutting back on immediate spending.
“If I have my eyes set on a certain type of RV to buy at retirement, then I’ll have to save more,” the researcher explains. “It might be less painful to work more than to consume less.”
Interestingly, people did not extend their work hours but instead delayed retirement, staying in the workforce longer.
Impacts on Investment Behavior
Higher wealth taxes did not alter portfolio allocations, as taxpayers continued to allocate similar portions of their wealth to stock market investments.
While the study focused on moderately wealthy individuals—those in the 85th to 90th wealth percentiles—the researcher speculates that ultra-rich individuals might respond similarly or even save more. For those driven by wealth accumulation, such as building business empires, the motivation to save could increase.
Policy Implications and Tax Design
The study does not advocate for or against wealth taxes but addresses the common argument that they discourage saving. The findings suggest that wealth taxes may have fewer behavioral distortions than expected, aligning with economists’ preference for taxes that minimally alter individual behavior.
In addition to wealth taxes, the researcher notes that other taxes on savings, such as those on dividends or capital gains, could also fit this criterion.
“My findings suggest that a wealth tax could fit this bill,” the author concludes, “but they don’t necessarily favor a wealth tax over other types of taxes on households’ wealth.”
The research highlights the need for thoughtful tax system design, aiming to balance revenue generation with minimal economic disruption. By exploring the nuanced effects of wealth taxes, it contributes to ongoing debates on how to address wealth inequality while maintaining economic stability.
