Thursday, February 2, 2023
Londoño-Vélez Presents Behavioral Responses To Wealth Taxation: Evidence From Colombia Today At UCLA
Juliana Londoño-Vélez (UCLA; Google Scholar) presents Behavioral Responses to Wealth Taxation: Evidence from Colombia (with Javier Avila-Mahecha (DIAN; Google Scholar)) at UCLA today as part of its Colloquium on Tax Policy and Public Finance hosted by Kirk Stark and Jason Oh:
We study behavioral responses to personal wealth taxes in Colombia using tax microdata (1993-2016) linked with the leaked Panama Papers, which shed light on offshoring to Colombia’s most relevant tax havens. We leverage variation from four reforms that modified the wealth tax design—tax duration and rate schedule—and introduced discrete jumps in the tax liability. Using bunching and difference-in-difference techniques, we obtain four key results. First, we find salient and compelling evidence that wealth tax hikes cause taxpayers to lower their reported wealth instantly—a reporting response that slashes, at most, one-fifth of tax revenue. Second, this response can persist even after the wealth tax no longer applies—i.e., “hysteresis”—reflecting taxpayers’ strategic avoidance behavior. Third, taxpayers misreport what authorities cannot cross-verify: they inflate (interpersonal) debt and underreport non-third-party-reported business assets. Lastly, the wealthiest taxpayers respond to wealth tax hikes by hiding assets in hard-to-track entities in tax havens.
Our findings have policy implications for the design of wealth taxes. First, expanding the coverage, quality, and usage of the information received by the tax authority about wealth owned by taxpayers is vital. This includes requiring individuals to report wealth separately by asset and debt type, enlarging the list of wealth items covered by third-party reporting, and systematically cross-validating this information for tax enforcement purposes. Moreover, efforts to tax wealth must come in tandem with cracking down on offshore evasion since offshoring is an essential mechanism for evasion for wealthy individuals. Combating offshore evasion necessitates additional policy instruments, such as promoting financial transparency, foreign asset reporting, and automatic TIEAs. It also requires cooperation from tax havens to share information about foreign-owned financial assets in their jurisdictions.
Lastly, it is worth discussing two limitations of our study. First, Colombia’s progressive abolishment of the wealth tax on firms—with its total elimination starting 2018—reinforces incentives for people to shift assets from the individual sector toward the corporate sector. Future research should study its impacts and the increasing role of family firms, which are difficult for the tax authority to penetrate (Slemrod, 2019). Second, Colombia recently has sought to crack down on personal wealth tax evasion with TIEAs and voluntary disclosures programs. Unfortunately, these enforcement instruments post-date the tax variation we study. Future research should evaluate how they interact with the behavioral responses to wealth taxes we have documented. Indeed, since the effective tax rate on a real behavior depends on the avoidance and evasion opportunities, taxpayers may react differently when these opportunities prove limited, possibly resorting to real responses. As a result, wealth taxation could affect bequests, consumption, saving, and investment.