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Taxing Wealth Unlocks Capital Gains: An Efficiency Rationale for Wealth Taxes

Author

Listed:
  • Sergio Ocampo
  • Guttorm Schjelderup
  • Floris Zoutman

Abstract

Realization-based capital income taxation generates capital lock-in because investors have an incentive to delay tax payments. This generates inefficiency as investors forgo investment opportunities that require them to realize capital gains. We show that wealth taxation can unlock capital, eliminating the distortion on investors’ portfolio choice. Moreover, wealth taxes do not distort this choice in the absence of capital income taxation. This provides an efficiency rationale for wealth taxation independent of equity: shifting revenues from capital income to wealth taxes reduces distortions on portfolio choice. We provide conditions for the optimal tax mix between capital income and wealth taxes that balance the equity gains from both taxes against efficiency losses related to savings and portfolio choices. These conditions hinge on the cross-base elasticity of capital income to wealth taxes which captures lock-in responses.

Suggested Citation

  • Sergio Ocampo & Guttorm Schjelderup & Floris Zoutman, 2026. "Taxing Wealth Unlocks Capital Gains: An Efficiency Rationale for Wealth Taxes," CESifo Working Paper Series 12830, CESifo.
    • Handle: RePEc:ces:ceswps:_12830
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    References listed on IDEAS

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    2. Marie-No lle Lefebvre & Eddy Zanoutene, 2022. "Wealth and Income Responses to Dividend Taxation : Evidence from France," TEPP Working Paper 2022-09, TEPP.
    3. Andrew G. Atkeson & Magnus Irie, 2022. "Rapid Dynamics of Top Wealth Shares and Self-Made Fortunes: What Is the Role of Family Firms?," American Economic Review: Insights, American Economic Association, vol. 4(4), pages 409-424, December.
    4. Ross, Stephen A, 1987. "Arbitrage and Martingales with Taxation," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 371-393, April.
    5. David Seim, 2017. "Behavioral Responses to Wealth Taxes: Evidence from Sweden," American Economic Journal: Economic Policy, American Economic Association, vol. 9(4), pages 395-421, November.
    6. Dammon, Robert M & Spatt, Chester S & Zhang, Harold H, 2001. "Optimal Consumption and Investment with Capital Gains Taxes," The Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 583-616.
    7. Marie-Noëlle Lefèbvre & Eddy Zanoutene, 2022. "Wealth and Income Responses to Dividend Taxation: Evidence from France," Working Papers hal-04104173, HAL.
    8. Joel Slemrod & Xinyu Chen, 2023. "Are capital gains the Achilles’ heel of taxing the rich?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 39(3), pages 592-603.
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    Keywords

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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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