Behavioural responses to wealth taxation: Evidence from Colombia

[Judi Lynn]

Juliana Londoño-Vélez / 16 Apr 2024

Interest in wealth taxation has grown in recent years as a way to combat inequality and raise revenue, but evidence on the responses to wealth taxes has so far been sparse. This column exploits changes in Colombia’s wealth taxation regime to examine behavioural responses. Taxpayers promptly reduced their reported wealth to fall below higher tax brackets when faced with wealth tax increases, largely by misreporting assets that authorities cannot verify. They continued to report lower levels of wealth for years following the tax’s implementation. The wealth tax also led to increasing numbers of Colombians establishing offshore entities annually and wealthier Columbians shifting their assets to tax havens.

Interest in progressive wealth taxation has grown as a way to combat inequality and generate revenue, especially in the post-COVID-19 era (e.g. Czajka et al. 2021). Yet, there is no consensus on the effects of such taxation. Scholars views’ differ: some highlight enforcement challenges and potential tax evasion (e.g. Bastani and Waldenström 2024), while others emphasise enduring impacts on wealth distribution and government revenue due to wealth accumulation dynamics (Jakobsen et al. 2020, Saez and Zucman 2019).

In a recent paper (Londoño-Vélez and Avila-Mahecha 2024), my co-author and I help fill this gap by estimating behavioural responses to wealth taxation in Colombia. We use extensive administrative tax microdata and leverage cross-sectional and time variation in individuals’ exposure to the wealth tax. Colombia featured average wealth tax rates and discrete notches at certain wealth thresholds. For instance, a taxpayer reporting slightly below 1 billion pesos in 2010 ($520,830) owed no tax, but an additional peso led to a 1% tax on all taxable wealth. Significant policy changes in four separate years, including tax duration, exemption thresholds, and rate schedules, create substantial identifying variation and provide one of the world’s largest wealth tax policy experiments.

Bunching below wealth tax brackets
Figure 1 compares individuals’ wealth holdings before and after Colombia’s temporary wealth tax. Taxpayers promptly reduce their reported wealth to fall below higher tax brackets when faced with wealth tax increases. A 1% increase in (one minus) the wealth tax rate leads to an immediate 2% rise in reported wealth for the marginal buncher, with one-fifth of revenue lost due to taxpayers’ instant response.

More:
https://cepr.org/voxeu/columns/behavioural-responses-wealth-taxation-evidence-colombia

[Bernardo de La Paz]

1. The bunching up under the brackets is expected. Was hoping for other analysis

I'm interested in wealth movement out of country, and effects on in investment inside the country.

Thanks for posting. The wealth and income disparity is an issue that needs to be addressed because it is a societal imbalance worldwide.