"Taxing Wealth in the Presence of Liquidity Constraints : Evidence from France”
joint work with Laurent Bach and Clément Malgouyres

Abstract : Real-world wealth taxes include income-based caps to make sure income-poor yet wealth-rich households do not have to sell illiquid assets. We show in the French context that these caps are binding mostly among households at the very top of the wealth distribution, who own liquid yet income-tax-deferred assets. These liquid assets typically amount to at least fifty times the yearly pre-cap tax. When the tax cap was temporarily removed in 2012, there was no subsequent surge in asset sales and decline in asset returns. When the wealth tax was cancelled in 2017, capped households’ taxable income rose swiftly and massively, notably through higher capital gains, life-insurance earnings, and dividends. We conclude that caps at such levels as were observed in France do not serve their theoretical purpose of protecting illiquid assets. Rather, they reduce the proceeds from progressive wealth taxes, and make wealth taxes act as an additional income tax precisely on the population whose wealth is a better proxy for taxpaying ability than income.