"Can Wealth Taxation Work in Developing Countries? Quasi-Experimental Evidence from Colombia", with Javier Avila (Job Market Paper)
This paper studies individual responses to wealth taxes and wealth tax enforcement using Colombian tax return microdata from 1993 to 2016 linked with the leaked “Panama Papers.” We estimate elasticities of reported wealth with respect to (one minus) the wealth tax rate, exploiting discrete jumps in wealth tax liability and reforms that vary exemption cutoffs and tax rates. We find clear evidence of immediate bunching responses to wealth taxes, with individuals lowering their reported wealth to reduce their tax burden. These immediate responses predominantly reflect avoidance and evasion, such as misreporting wealth items subject to less third-party reporting. In our main analysis, the short-term elasticity of reported wealth is 2, and bunching reduces revenues by at most one-fifth of projected revenues. We complement the local bunching analysis by studying offshore sheltering in Colombia’s most relevant tax havens. We show that offshore entities are predominantly used by the wealthiest taxpayers, and that they use them at least in part to hide their assets from the tax authority. Finally, we show that better enforcement improves wealth tax collection. A voluntary disclosure scheme taking place between 2015 and 2017 encouraged evaders to disclose 1.7 percent of GDP in hidden wealth. Two-fifths of individuals in the wealthiest 0.01 percent disclosed under the scheme—disproportionately reporting concealed foreign assets—and, as a result, pay more taxes. Halfway through the scheme, the Panama Papers news stories broke, shocking perceived detection probabilities and raising disclosures by more than 800 percent. This, possibly coupled with harsher sanctions for noncompliance, contributed to improving tax progressivity at the top.