Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark

Abstract

Using administrative wealth records from Denmark, we study the effects of wealth taxes on wealth accumulation. Denmark used to impose one of the world's highest marginal tax rates on wealth, but this tax was drastically reduced and ultimately abolished between 1989 and 1997. Due to the specific design of the wealth tax, these changes provide a compelling quasiexperiment for understanding behavioral responses among the wealthiest segments of the population. We find clear reduced-form effects of wealth taxes in the short and medium run, with larger effects on the very wealthy than on the moderately wealthy. We develop a simple lifecycle model with utility of residual wealth (bequests) allowing us to interpret the evidence in terms of structural primitives. We calibrate the model to the quasi-experimental moments and simulate the model forward to estimate the long-run effect of wealth taxes on wealth accumulation. Our simulations show that the long-run elasticity of wealth with respect to the net-of-tax return is sizeable at the top of distribution. Our paper provides the type of evidence needed to assess optimal capital taxation.

Time Discounting and Wealth Inequality

“…Our results are robust to the inclusion of these components, see the robustness analysis in Section 4.2. The Danish wealth data have been used previously for research on wealth inequality (Boserup et al 2016), retirement savings (Chetty et al 2014a), impact of credit constraints (Leth-Petersen 2010; Kreiner et al 2019), effects of wealth taxation(Jakobsen et al 2018) and accuracy of survey responses(Browning and Leth-Petersen 2003;Kreiner et al 2015). Wealth inequality has been reasonably stable in Denmark over the 35-year observation period, with the top 10 percent richest owning between 50 and 80 percent of wealth depending on the definition of wealth and the sample considered(Boserup et al 2016;Jakobsen et al 2018).…”

The Wealth of Parents: Trends over Time in Assortative Mating Based on Parental Wealth

“…Around half of total household wealth is owned by the top 10% wealthiest households, and around one-fifth of total household wealth is owned by the top 1% of households (Jakobsen et al 2018). A concentration of parental wealth homogamy at the top can be consequential for intergenerational wealth inequality, even if parental wealth homogamy is relatively low for the parental wealth distribution overall.…”

“…Wealth inequality has been fairly stable in Denmark over the last decades, except for slightly increasing wealth shares among the top 1% (Jakobsen et al 2018). On the other hand, with a correlation in wealth across generations of around 0.4, the intergenerational transmission of wealth in Denmark is low compared to the United States (Boserup et al 2013), which could reduce the preference for partners with high parental wealth.…”

“…assessments of housing values are made by the tax authorities). Denmark taxed wealth until 1996, but the collection of wealth data continued with some slight modifications after its abolishment (Jakobsen et al, 2018). Following Boserup et al 2013, we define net wealth as total assets (financial assets and housing) minus debts as retrieved by Statistics Denmark from data collected by the Danish Tax Agency.…”

“…were not recorded anymore after that (including cars, boats, caravans), and the registration of company values changed several times until 1997 (Jakobsen et al 2018). Boserup and colleagues (2013) exploited an overlap in both ways of measuring wealth to show how the measurement of wealth from 1997 onward was well approximated by the measurement of wealth up to that point.…”