Some people have proposed taxing the wealthiest people in the United States as a way to reduce the country’s chronic trillion-dollar deficits. This tax would be on their accumulated wealth rather than on their annual income.
Elizabeth Warren, a Democratic senator from Massachusetts, introduced a wealth tax of 2% and 3% on individuals whose net worth exceeded $50 million and $1 billion, respectively.
Critics claimed that it would shrink the economy by reducing Americans’ incentives to save money. Warren’s proposal has never come to a vote.
A new study from the McCombs School of Business at the University of Texas at Austin questions whether a wealth tax would reduce savings.
Wealth Tax in Norway
Assistant professor of finance, Marius Ring, conducted research on the practical effects of a wealth tax in Norway — one of the few nations with such a policy in place. His findings suggest that the tax encourages people to save more.
Ring said:
“Wealth taxation does not seem to reduce how much people save. Taxing someone’s savings doesn’t necessarily imply that they will want to save less.”
Ring wrote about his study and findings in the peer-reviewed journal The Review of Economic Studies (citation below).
In Norway, people whose net worth is more than $160,000 have to pay a tax on their wealth of of 1%. The tax affects 15% of the country’s taxpayers.
Ring studied how this tax was applied in different areas of Norway between 2005 and 2015. He compared this with data on household savings, housing details, and property prices. He found that:
- For every extra 1 Norwegian Krone (NOK) paid in wealth tax, households saved an additional 3.76 NOK each year.
- Most of these savings came from people working more rather than spending less.
According to Ring, people work more because they do not want to reduce their future consumption plans. Economists refer to this as the income effect, which means that greater income allows for higher spending.
Ring explained:
“It relates to how downward adjustment of consumption is unpleasant. If I have my eyes set on a certain type of RV to buy at retirement, then I’ll have to save more. It might be less painful to work more than to consume less in order to increase my savings.”
People Retire Later
Rather than working longer hours, he added, people retire later – they remain longer in the workforce.
His findings also showed that higher wealth taxes had no effect on people’s investment portfolio allocations.
Those with larger tax bills allocated the same proportion of their wealth to stock market investments.
In fact, he suggests that if the ultra-rich prioritize accumulating wealth over spending it — such as expanding a business empire — they might save even more.
He clarifies that he is not advocating for or against a wealth tax. Instead, he is examining one of the criticisms by demonstrating that it does not necessarily reduce savings.
Ring suggests that his findings could help policymakers design a good tax system. Economists prefer taxes that don’t affect people’s behavior too much.
His research suggests that a wealth tax could be one of these, but other taxes, such as those on dividends or capital gains, might work too.
Ring said:
“My findings suggest that a wealth tax could fit this bill. But they don’t necessarily favor a wealth tax over other types of taxes on households’ wealth.”
Citation
Ring, M. A. K. (2024). Wealth Taxation and Household Saving: Evidence from Assessment Discontinuities in Norway. The Review of Economic Studies. https://doi.org/10.1093/restud/rdae100