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Atlanta Marriott Marquis, M301
American Economic Association
Wealth Inequality & Wealth Taxation
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Henrik Kleven, Princeton University
Time Discounting, Savings Behavior and Wealth Inequality
AbstractThe distribution of wealth in society is very unequal and has important economic and political consequences. According to standard life-cycle savings theory, differences in time discounting behavior across individuals can play an important role for their position in the wealth distribution. Empirical testing of this hypothesis has been difficult because of serious data limitations. We overcome these limitations by linking an experimental measure of time discounting for a large sample of middle-aged individuals to Danish high-quality administrative data with information about their real-life wealth over the life-cycle as well as a large number of background characteristics. The results show that individuals with relatively low time discounting are persistently positioned higher in the wealth distribution. The relationship is of the same magnitude as the association between years of education and the position in the wealth distribution, and it robustly persists after controlling for a large number of theoretically motivated confounders such as education, risk aversion, school grades, income, credit constraints, initial wealth, and parental wealth. These findings support the view that individual differences in time discounting affect individuals’ positions in the wealth distribution through the savings channel.
Use It or Lose It: Efficiency Gains from Wealth Taxation
AbstractThis paper studies the implications of wealth taxation (tax on the stock of wealth) and capital income taxation (tax on the income flow from capital) in an overlapping-generations incomplete-markets model with persistent rate of return heterogeneity across individuals. With such heterogeneity, the effects of wealth taxation differs starkly (and are sometimes the opposite) from those of capital taxation for efficiency and some key distributional outcomes. In particular, under capital income taxation entrepreneurs who are more productive, and therefore generate more capital income, pay higher taxes. Under wealth taxation, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the base and shifts the tax burden from productive to unproductive entrepreneurs. This reallocation increases aggregate productivity and output. In the simulated model calibrated to the US data, a revenue-neutral tax reform that replaces capital income tax with a wealth tax raises welfare by about 8% in consumption-equivalent terms. Moving on to optimal taxation, the optimal wealth tax is positive, yields even larger welfare gains than the tax reform, and is preferable to optimal capital income taxes. Unlike optimal capital taxes, optimal wealth taxes reduce consumption inequality relative to the current US system, even though wealth inequality rises. Consequently, wealth taxes can yield both efficiency and distributional gains.
Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark
AbstractUsing 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 quasi-experiment 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.
- D3 - Distribution
- D6 - Welfare Economics