This reform is ideal for studying behavioral responses to wealth taxation for several reasons. First, the Norwegian government collects precise data reported by third parties on the wealth of its citizens, even including the estimated value of used cars. Our study uses wealth data collected between 2015 and 2022. Second, the wealth-tax reform in Bø has not been reversed. Third, most studies on the behavioral effects of wealth taxation focus on reforms that impact the very top of the wealth distribution, where tax evasion is more pervasive and the share of business owners is very high (approximately 50 percent in the top 0.1 percent of the wealth distribution). However, our study focuses on a municipal wealth-tax reform that affected approximately the top 10 percent of the wealth distribution. This reduces the extent to which tax evasion affects our estimates of the effect of the reform. Additionally, this implies that the share of business owners among the affected population is smaller, which limits the risk that undervaluation of unlisted companies affects our findings.
Our research documents a significant 60 percent increase in average taxable wealth in Bø in response to a 1 percentage point drop in the wealth-tax rate. Among only those subject to the wealth tax (i.e., wealth-tax payers), the effect was a 68.7 percent increase in average taxable wealth. Thus, wealthier individuals reacted more strongly to the tax change than less wealthy individuals.
A primary explanation for the increase in average taxable wealth is that wealth-tax payers moved to Bø following the reform. Between 2015 and 2019, the percentage of net wealth in Bø owned by people who moved to Bø that year was 1 percent or less each year. However, 68 percent of net wealth in Bø was owned by people who moved to Bø in 2020—the year before the reform went into effect. This figure was 21 percent in 2021. The reform increased the likelihood that wealth-tax payers would move to Bø from other Norwegian municipalities by 0.34 percent compared with movers whose wealth was below the exemption threshold. For individuals with a net worth of more than NOK 10 million, the likelihood of moving to Bø increased by 3.1 percent.
Our analysis relies on the assumption that there was no reason for wealth-tax payers to move to Bø other than lower taxation on their wealth. Our study is the first to examine the effect of a wealth-tax reform in a small, rural setting. Therefore, we can rule out the possibility that people who moved to Bø were attracted by amenities only offered by larger cities.
The number of wealth-tax payers who moved to Bø was substantial relative to Bø’s population. Between 2015 and 2019, no more than six wealth-tax payers moved to Bø each year. However, between 2020 and 2022, 56 wealth-tax payers moved to Bø. In 2021, 280 of Bø’s 2,751 residents were wealth-tax payers, approximately 10 percent of the local population. It is possible that the influx of wealthy individuals moving to Bø could have been substantially larger had there not been short-run real estate constraints.
Nevertheless, movers to Bø constitute a relatively small share of the total Norwegian wealth-tax payer population. There was no large-scale exodus from other municipalities to Bø. This finding indicates that migration to avoid wealth taxation is not an inevitable outcome of localized preferential tax regimes. However, Bø is a remote location in the country’s north with a declining population and limited amenities, which may have discouraged wealthy individuals from moving there. Thus, this finding may not apply to reforms in urban settings.
One potential explanation for why few wealth-tax payers moved to Bø is that relocating to a more favorable tax jurisdiction outside Norway might be more attractive. However, our research finds that wealth-tax payers are underrepresented among those who move out of Norway each year. Wealth-tax payers constitute 10 percent of Norway’s population, but they represented only 1.8–3.3 percent of those who moved out of Norway each year between 2015 and 2022.
