Avoidance Responses to the Wealth Tax

As a consequence of the Great Recession, the Spanish government reintroduced the Wealth Tax in 2011. We exploit the variation in wealth tax exposure to analyse taxpayers’ responses to this reintroduction. While facing higher wealth taxes did not discourage savings, results indicate that a 0.1 percentage point increase in the average tax rate leads to a reduction in taxable wealth of 3.21% over 4 years. In particular, the reduction in taxable wealth comes from taking advantage of exemptions, mostly business-related. Thus, the reintroduction induced avoidance. Taxpayers also take advantage of the limit on tax liability through a change in their asset and income composition. By far, this latter source of avoidance accounts for the greatest impact on tax revenues (92.6%). The impact of these avoidance strategies on revenue collected was far from negligible, since according to our estimates they represent a 2012-2015 revenue loss of 2.75 times the 2011 estimated wealth tax revenues. These findings should be useful to policymakers and administrations considering the implementation of a wealth tax, as they illustrate the pitfalls to be circumvented. • Taxpayers respond significantly to the reintroduction of the wealth tax in Spain. • They reduce taxable wealth in favour of exempt assets. • They change their asset and income portfolio to apply the limit on tax liability. • The use of the limit accounts for most of the impact on revenue reduction (92.6%).