Introduction
Since Thomas Piketty’s (Reference Piketty2014) ground-breaking Capital in the Twenty-First Century, the rising wealth accumulation of the rich in affluent democracies has drawn growing attention from the literature. For example, various estimates show that since the 1980s the wealth share of the top one per cent has either edged close to or surpassed 40 per cent across the United States and Europe, while the share of the bottom 75 per cent remains stagnant at around 10 per cent (Zucman, Reference Zucman2019; Chancel et al., Reference Chancel, Piketty, Saez and Zucman2022; Saez and Zucman, Reference Saez and Zucman2019). Underlying this development, scholars often highlight a growing political disconnect between the preferences of the public (which tend to favour higher taxes on wealth) and the actual policy response of centre-left parties (which tend to refrain from such taxes despite their traditional support for greater income redistribution). According to this literature, factors including financialization (Lierse, Reference Lierse2021; Piketty et al., Reference Piketty, Saez and Zucman2023), international tax competition (Mathisen, Reference Mathisen2024; Saez and Zucman, Reference Saez and Zucman2019; Osterloh and Debus, Reference Osterloh and Debus2012), the rise of the knowledge economy (Hope and Limberg, Reference Hope and Limberg2022) and the growing scale of tax avoidance (Tørsløv et al., Reference Tørsløv, Wier and Zucman2023; Clausing, Reference Clausing2016; Cobham and Janský, Reference Cobham and Janský2018) have all prompted left governments to converge with the right in limiting the taxation of wealth. In other words, the growing political power of financial capital has curtailed the ability of left governments to counter the inequality from rising wealth concentration.
The current article argues that even though the political power of global financial capital may constrain left governments from broadly taxing wealth, such governments continue to influence wealth accumulation subtly, by adjusting the relative difference by which different types of wealth are taxed. In particular, because financial wealth is far more likely to be held by the rich than housing wealth, increasing taxes on the former relative to the latter will raise the relative return on housing and help reduce inequality (Kuhn et al., Reference Kuhn, Schularick and Isabel Steins2020; Jordà et al., Reference Jordà, Katharina Knoll, Schularick and Taylor2019; Wolff, Reference Wolff2017). However, since housing is by far the largest asset for most households, such a tax policy also pushes up overall wealth relative to income, which also increases economic inequality because wealth itself is far more concentrated than income (Rognlie, Reference Rognlie2014, Reference Rognlie2015; Bonnet et al., Reference Bonnet, Bono, Chapelle and Wasmer2014; Jones, Reference Jones2015; Saez and Zucman, Reference Saez and Zucman2016). Given this trade off, how do left governments in affluent democracies balance the taxation of financial and housing wealth?
As Piketty and Zucman (Reference Piketty and Zucman2014: 1,260) famously point out, “capital is back because low growth is back”: as declining population growth in advanced economies slows the growth of total income relative to the saving rate, financial wealth increases relative to income. At the same time, slowing population growth has an opposite downward effect on housing wealth by reducing housing demand (Davis and Heathcote, Reference Davis and Heathcote2007; Bonnet et al., Reference Bonnet, Bono, Chapelle and Wasmer2014; Rognlie, Reference Rognlie2015). As a result, when population growth slows, financial wealth tends to gain at the expense of housing wealth. Drawing from this intuition, the article argues that, when population growth is low, left governments tend to increase taxes on financial relative to housing wealth (that is, “tilt the balance” toward housing). When population growth is high, left governments tend to focus on constraining overall wealth buildup, by taxing housing wealth more heavily instead.
Consistent with this prediction, the article shows empirically that left governments increase taxes on financial relative to housing wealth when population growth is low, but tax housing more heavily when population growth is high. Furthermore, using data on the return on wealth across 16 advanced economies, the article draws out the distributive implications from this tax strategy: when population growth is low, left government partisanship tends to reduce the return on financial relative to housing wealth; when population growth is high, left partisanship reduces the overall wealth-to-income ratio in the economy. In other words, depending on the pace of population growth, left governments either “tilt the balance” or “shrink the size” of household wealth in advanced economies.
This article speaks to the literature on the diminishing influence of government partisan ideology on economic policy making in the neoliberal era. While right-wing governments may sometimes tolerate high taxes for electoral reasons, in an aggregate sense higher taxes are still generally associated with left governments (Haddow, Reference Haddow2016; Béland et al., Reference Béland, Dinan, Jacques and Maler2023; Joshi, Reference Joshi2021). However, for the taxation of wealth more specifically, the association with left governments has faded over time. As various scholars point out, conditions such as financialization (Lierse, Reference Lierse2021; Piketty et al., Reference Piketty, Saez and Zucman2023), global competition for capital (Mathisen, Reference Mathisen2024; Saez and Zucman, Reference Saez and Zucman2019; Osterloh and Debus, Reference Osterloh and Debus2012) and the efforts of the wealthy to avoid taxes (Hacker and Pierson, Reference Hacker and Pierson2010; Gilens, Reference Gilens2012; Bertrand et al., Reference Bertrand, Bombardini, Fisman and Trebbi2020; Kuhner, Reference Kuhner2014) have all pressured left governments to converge with the right and refrain from broadly increasing taxes on wealth. Complementing this perspective, the current article’s findings imply that even if a blanket increase of taxes on wealth is no longer politically feasible, left governments continue to use taxes to indirectly influence the return on wealth as well as the scale of overall wealth accumulation. Government partisanship, in other words, continues to subtly shape wealth policy and wealth outcomes.
Taking this argument one step further, the article shows that left partisanship affects wealth taxation policy in very different ways depending on the pace of population growth. This argument has broader implications for the cross-country variation in the economic effect of social democracy, because population growth tends to be lower in European countries than other advanced economies due to lower levels of fertility as well as immigration (Piketty and Zucman, Reference Piketty and Zucman2014). The left and right panel of Figure 1 plot the average effective tax rate on, respectively, financial and housing wealthFootnote 1 for the European subset of countries covered in this article. As the figure shows, while the plots of financial wealth taxation and left government partisanship (measured as left government seat share) tend to parallel each other since the mid-1980s (a period coinciding with the rise of wealth concentration (Chancel et al., Reference Chancel, Piketty, Saez and Zucman2022; Zucman, Reference Zucman2019)), the plots of housing wealth taxation and left partisanship tend to be mirror images of each other instead, which implies that left incumbency tends to be positively associated with taxes on financial wealthFootnote 2 but negatively associated with taxes on housing wealth. In other words, while left governments are not necessarily associated with more taxes on wealth overall (consistent with the global constraint on taxing wealth identified by the existing literature), they tend to be distinctively associated with lighter taxation of housing relative to financial wealth. This distinctive pattern, however, becomes less clear in Figure 2, which covers other (non-European) advanced economies in the article. While econometric analyses later in the article will more formally examine the contextual effect of population growth, the informal comparison between European countries and other advanced economies here does illustrate the potential difference made to left government tax policies by different population growth rates.
Figure 1. Taxation of Financial and Housing Wealth (European Countries).
Figure 2. Taxation of Financial and Housing Wealth (Other Advanced Economies).
Secondly, this article also speaks to the literature on the evolving programmatic strategy and electoral fortune of social democratic parties in affluent democracies. Various scholars have shown that, despite a secular trend of growing embourgeoisement, redistribution continues to be a key contributing factor to social democratic electoral success (Bremer, Reference Bremer2018; Jansen et al., Reference Jansen, Evans and Dirk de Graaf2012; Polacko, Reference Polacko2022). For example, while the role of traditional party/union organization has faded, redistributive class conflicts continue to predict left party support (Emanuele, Reference Emanuele2023). At the same time, however, Benedetto et al. (Reference Benedetto, Hix and Mastrorocco2020) show that the shrinking of the traditional industrial working class has played an important role in the electoral decline of social democratic parties, which forces these parties to rely increasingly on the support of the middle class. What, then, is a redistributive agenda that improves the relative position of the middle class? This article’s findings suggest that, as slowing population growth further boosts the financial accumulation of the wealthy at the expense of middle class (housing) wealth, “redistribution between the rich and the middle” may become an increasingly important strategy for social democratic parties to remain electorally viable.
Relatedly, this article also speaks to the literature on partisanship and inequality (Haddow, Reference Haddow2014; Joshi, Reference Joshi2021; Lupu and Pontusson, Reference Lupu and Pontusson2011; Iversen and Soskice, Reference Iversen and Soskice2015), and highlights the inherent limitation faced by left governments when they attempt to counter inequality by lessening taxes on housing wealth. Figure 3 plots the average effective tax rate on housing wealth, as well as the average ratio of housing wealth to income (the latter data series unfortunately ends in 2011 rather than 2015) for the countries covered in the article.
The two series are mirror images of each other, implying that lower taxes on housing wealth indeed tend to result in higher levels of housing wealth.
Figure 3. Housing Wealth Taxation and Housing Wealth to Income Ratio.
While such an outcome may reduce wealth inequality between the middle class and the rich, it may also potentially contribute to other forms of economic inequality, not only because wealth is itself far more concentrated than income (Jones, Reference Jones2015; Saez and Zucman, Reference Saez and Zucman2016), but also because housing wealth accumulation tends to be accompanied by financial deregulation and mortgage securitization. Instead of relieving housing shortage, these housing financialization reforms often lead to unsustainable demand, reduce housing affordability and increase mortgage debt (Kohl, Reference Kohl2020, Reference Kohl2021; Lin and Neely, Reference Lin and Neely2020; Aalbers, Reference Aalbers2017; Fernandez and Aalbers, Reference Fernandez and Aalbers2016). Greater mortgage borrowing in effect transfers more interest payments from lower-income households (who tend to hold more mortgage debt) to higher-income households (who tend to hold more financial assets that serve as the source of credit) (Campbell and Hercowitz, Reference Campbell and Hercowitz2009; Kumhof et al., Reference Kumhof, Rancière and Winant2015). Consistent with the inequality-inducing potential of accelerated housing markets, this article shows that left governments indeed tend to shy away from the pro-housing tax strategy when faster population growth already presents a structural condition for elevated housing demand.
To facilitate the article’s theoretical discussion and empirical analysis, it is important to clearly define household wealth. As Alvaredo et al. (Reference Alvaredo, Atkinson, Lucas Chancel, Saez and Zucman2016) and Piketty and Zucman (Reference Piketty and Zucman2014) point out, wealth in the household sector encompasses the total financial and housing assets owned by households. In this terminology, “assets” and “wealth” are used interchangeably as a reference to a store of value (Jordà et al., Reference Jordà, Schularick, Taylor, Eichenbaum and Parker2017). Nevertheless, because household financial assets also encompass corporate profits through the ownership of equities and bonds as well as unincorporated pass-through business income (Piketty and Zucman, Reference Piketty and Zucman2014; Smith et al., Reference Smith, Yagan, Zidar and Zwick2019), financial wealth is also meaningful in a growth-accounting framework as a factor of production, and therefore commonly referred to as “capital” (in distinction from “labour”). For example, McDaniel’s (Reference McDaniel2007) effective tax rate on incomes from financial wealth (a key measure adopted in this article) includes corporate profits and other business income, and as a result it is referred to as the effective tax rate on “capital” income, and I keep this terminology in discussing McDaniel’s measure.
The rest of the article is organized as follows. In the next section, I lay out the article’s main theoretical argument. Section 3 explains data and measurement, and section 4 provides the empirical analysis. I conclude and outline directions for future research in section 5.
The Main Argument
Since the 1980s, the taxation of wealth has been in retreat across affluent democracies for several reasons. Firstly, such taxes are vulnerable to offshore asset-shifting (Chancel et al., Reference Chancel, Piketty, Saez and Zucman2022; Bastani and Waldenström, Reference Bastani and Waldenström2018; Cobham and Janský, Reference Cobham and Janský2018). For example, Zucman (Reference Zucman2015) shows that globally 8 per cent of household financial wealth is held in offshore tax havens. Secondly, systematic exemptions (for example, for the business wealth of owner-managers) create opportunities for the rich to avoid taxes. Thirdly, because such taxes rely on self-assessment rather than third-party reporting, there is generally weak enforcement (Piketty et al., Reference Piketty, Saez and Zucman2023). More broadly, because the direct taxation of wealth stocks relies on a narrow and hard-to-assess tax base, yet creates the risk of financial capital flight, there is a general convergence between left and right governments toward a neoliberal model of zero taxation on the stocks of financial wealth (Lierse, Reference Lierse2021). As the Organization for Economic Co-operation and Development (OECD) (2018) points out, only two of the 15 countries covered in the article’s tax analysis (France and Spain) still levy some taxes on the stocks of financial wealth. Such taxes only account for 1 per cent of total tax revenue. Of these, inheritance, estate and gift taxes altogether account for only 0.4 per cent. As a result, taxing financial wealth in advanced economies is mainly in the form of taxing the income from financial wealth (that is, taxation of capital income), which is politically more feasible because it draws on a larger tax base and taps directly into monetary flows instead of relying on assessing the value of assets (Genschel et al., Reference Genschel, Limberg and Seelkopf2024; OECD, 2021).
Nevertheless, the taxation of capital income itself also faces growing political constraint. For example, on the corporate side, since the 1980s, the global average statutory tax rate on corporate income fell from 49 to 24 per cent, and the effective tax rate fell from 25 to 18 per cent (Chancel et al., Reference Chancel, Piketty, Saez and Zucman2022). A similar picture emerges on the personal side, as various Scandinavian countries introduced dual income tax schemes that tax personal capital income at a lower and flatter rate than labour income (Elässer et al., Reference Elässer, Fastenrath and Rehm2023; Piketty et al., Reference Piketty, Saez and Zucman2023). For example, Mathisen (Reference Mathisen2024) shows that, even in an egalitarian country with strong left governments like Norway, there is a large discrepancy between public preference and the actual tax rate at the top of income distribution, driven almost entirely by the preferential treatment of capital income to prevent capital moving elsewhere. More broadly, these declining trends of capital income taxation suggest that the rise of global financial capital has increasingly altered the political balance of power, constraining the ability of left governments to increase taxes on wealth (Piketty et al., Reference Piketty, Saez and Zucman2023; Hacker and Pierson, Reference Hacker and Pierson2010; Gilens, Reference Gilens2012).
Nevertheless, by conceding to the right’s main position of not broadly increasing taxing on wealth overall, left governments may also create more political room to curb wealth inequality subtly, by taxing some wealth more lightly than others. In particular, the overall extent of wealth accumulation is not the only source of inequality: the relative balance between financial and housing wealth matters as well. Because financial wealth is far more narrowly held by the rich than housing wealth (which represents the predominant form of middle-class asset), an increase in financial relative to housing wealth also contributes to higher inequality (Jakobsen et al., Reference Jakobsen, Jakobsen, Kleven and Zucman2020; Wolff, Reference Wolff2017; Fagereng et al., Reference Fagereng, Guiso, Malacrino and Pistaferri2020; Kuhn et al., Reference Kuhn, Schularick and Isabel Steins2020).
As Piketty and Zucman (Reference Piketty and Zucman2014) point out, the rising financial wealth-to-income ratio they document across most advanced economies is fundamentally a result of slow growth, where the growth of national income falls behind the rates at which income is saved (Krusell and Smith, Reference Krusell and Smith2015). As Piketty and Zucman further point out, in advanced economies most of the variation in total income growth stems from differences in population growth (which embody relatively large differences in immigration and fertility levels between countries), while differences in per capita income or total factor productivity (which embody relatively small differences in technological progress) are much smaller. As a result, slowing population growth plays an important role in increasing the financial wealth-to-income ratio.
On the other hand, slowing population growth also reduces housing demand, which tends to depress housing wealth for the following reason. Houses are bundles of structures and land, with the latter capturing not only the size of the lot, but also all the characteristics associated with its location, such as commuting distance and accessibility to attractions (Davis and Heathcote, Reference Davis and Heathcote2007; Knoll et al., Reference Knoll, Schularick and Steger2017). The supply of such characteristics, however, is highly inelastic. Besides being relatively fixed in quantity, developed lots are also completely fixed in location. In fact, at any specific location, the supply of land is perfectly inelastic (Capozza et al., Reference Capozza, Green, Hendershott, Aaron and Gale1996). Empirically, Davis and Heathcote (Reference Davis and Heathcote2007) estimate that, after factoring in population growth, changes in developed land per capita in response to house demand is close to zero. In particular, because the conversion of farmland for development tends to be irreversible (the cost of reconversion is prohibitive), existing residential land stocks cannot shrink in response to slowing house demand (Glaeser et al., Reference Glaeser, Gyourko and Saks2005; Capozza & Helsley, Reference Capozza and Helsley1990). As a result, the effect of slowing population growth on the housing market tends to be capitalized into lower house prices, which depresses housing wealth (Davis and Heathcote, Reference Davis and Heathcote2007; Davis and Palumbo, Reference Davis and Palumbo2008; Capozza et al., Reference Capozza, Green and Hendershott1998; Hendershott and White, Reference Hendershott and White2000).
Discussion above suggests that when population growth is low, financial wealth (which is disproportionately held by rich households) tends to gain at the expense of housing wealth (which is more widely held). To counter this source of inequality, left governments can tilt the balance toward housing wealth by increasing taxes on financial relative to housing wealth. Differential tax treatment of different types of wealth has distributive consequences because it tends to alter the relative return on wealth. In particular, when the government treats one asset class unfavourably relative to the other, households and businesses will respond by rebalancing their demand toward the latter, thus driving up the return on housing relative to financial wealth (Gervais, Reference Gervais2002; Nakajima, Reference Nakajima2010). Since a better return on wealth allows wealth to accumulate faster (Piketty and Zucman, Reference Piketty and Zucman2014; Bach et al., Reference Bach, Calvet and Sodini2020), a relative gain in the return on housing relative to financial wealth will contribute to lower wealth inequality (Kuhn et al., Reference Kuhn, Schularick and Isabel Steins2020; Jordà et al., Reference Jordà, Katharina Knoll, Schularick and Taylor2019; Wolff, Reference Wolff2017).
On the other hand, when population growth is high, the accumulation of financial wealth tends to be less pronounced. As Piketty and Zucman (Reference Piketty and Zucman2014) point out, the central reason why the ratio of private financial savings to income is less elevated in some New World countries (such as the United States and Australia) than Europe is higher population growth rates, driven by higher fertility as well as immigration. Nevertheless, high population growth creates a different source of inequality, because the effect of high population growth on the housing market tends to be capitalized into higher house prices. As noted above, the supply of land is perfectly inelastic at any specific location (Capozza et al., Reference Capozza, Green, Hendershott, Aaron and Gale1996). As a result, to the extent that some additional land can be developed in response to rising house demand, new development tends to occur at the outer boundary of existing cities. As cities are pushed outward by new development, the locational premium on existing lots inside the boundary rises, further driving up average house prices (Davis and Palumbo, Reference Davis and Palumbo2008; Capozza et al., Reference Capozza, Green and Hendershott1998). For example, Rognlie (Reference Rognlie2014, Reference Rognlie2015) finds that rising housing demand is a key driver of rising housing wealth in advanced economies, which in turn accounts for around 80 per cent of the increase in the overall wealth-to-income ratio. Because wealth itself is far more concentrated than income, this outcome also results in greater economic inequality. To counter this source of inequality, left governments will reduce the overall wealth-to-income ratio by taxing housing wealth more heavily instead.
Of course, when the government shifts the tax burden to housing wealth, it may indirectly drive up the relative return on financial wealth, but this latter consequence is mitigated by a context of strong population growth, which inhibits the rise of the financial wealth-to-income ratio (Piketty and Zucman, Reference Piketty and Zucman2014). The pace of population growth, in other words, will condition how left governments in advanced economies choose to tax wealth, as well as the distributive consequences.
H1: When population growth is low, left governments are likely to increase taxes on financial relative to housing wealth; when population growth is high, this strategy is likely to be reversed.
H2: “Tilting the balance”: when population growth is low, left government partisanship is likely to reduce the return on financial relative to housing wealth; when population growth is high, this effect is likely to be reversed.
H3: “Shrinking the size”: when population growth is high, left government partisanship is likely to reduce the overall wealth-to-income ratio; when population growth is low, this effect is likely to be reversed.
Data and Measurement
To measure the taxation of financial wealth, I use McDaniel’s (Reference McDaniel2007) effective tax rate on financial capital income, which is available for 15 advanced economies.Footnote 3 More specifically, the effective tax rate is calculated as the ratio of tax revenue from financial capital income over the corresponding actual capital income base in the economy, based on detailed national account statistics. As McDaniel points out, this measure captures tax revenue from not only corporate taxes (including the operating surplus earned by corporations as well as private unincorporated enterprises) but also personal capital income taxes (including the capital share of income by the self-employed, as well as corporate income transferred to the household, since, as owners of corporations, households receive all final after-tax corporate profits). An important limitation of the McDaniel measure is that it only covers taxes on the income from financial wealth, rather than the stock of financial wealth (including estate taxes). However, as noted in Section 2 of this article, direct taxation of financial wealth stocks is today present in only two of the 15 countries included in the article’s tax analysis (OECD, 2018), representing on average less than 1 per cent of total tax revenue (and estate tax representing less than 0.4 per cent). As a result, the unfortunate omission of direct taxes on wealth stocks should only leave out a small proportion of the overall variation in financial wealth taxation.
To measure the taxation of housing wealth, I turn to the OECD’s Revenue Statistics, which provides the annual total amount of central government tax revenue on housing wealth. According to the International Monetary Fund’s Government Finance Statistics Manual (IMF, 2014), tax revenue under this category encompasses recurrent taxes on immovable property (land, buildings and structures), recurrent taxes on net wealth from (and minus debt liabilities on) property, taxes on the sale and transfer of property, as well as capital levies and other recurrent and non-recurrent taxes (Norregaard, Reference Norregaard2013). To obtain an effective tax rate on housing wealth, I divide the tax revenue by the total amount of fixed capital formation in housing (available from the OECD’s Economic Outlook, subsection “Expenditure and GDP”). In this article, I am interested in not only the level of taxes on financial and housing wealth, but also their relative difference. Therefore, I also calculate the “wedge” between taxes on financial and housing wealth, which is the effective tax rate on financial wealth minus the effective tax rate on housing wealth. Because the tax rates are expressed as percentages, so is the wedge between them.
To measure the return on wealth, I draw from Jordà et al. (Reference Jordà, Katharina Knoll, Schularick and Taylor2019), which provides annual data on the return on housing as well as financial wealth (including equity, bonds and bills) for 16 advanced economies.Footnote 4 The measures incorporate not only capital gains but also investment income (yield). The data are inflation-adjusted real returns, expressed in percentages. As noted earlier, the relative difference between the returns on financial and housing wealth is the key outcome of interest for this article. To directly capture this outcome, I calculate the excess return of various financial assets including equity, bonds and bills over housing wealth. More specifically, the excess return on equity over housing wealth is the real return on equity (listed as well as private) minus the real return on housing wealth. The excess returns on bonds and bills over housing are calculated analogously. Data on the ratio of overall household wealth (including financial as well as housing wealth) to disposable income are from Piketty and Zucman (Reference Piketty and Zucman2014) and Carroll et al. (Reference Carroll, Slacalek and Sommer2011). Results remain unchanged when I use ratios of wealth over gross national income instead of disposable income, based on data from Alvaredo et al. (Reference Alvaredo, Atkinson, Lucas Chancel, Saez and Zucman2016)’s World Wealth and Income Database.
To increase the robustness of findings, I use three different measures of left partisanship (all drawn from the Comparative Welfare State Dataset (Brady et al., Reference Brady, Huber and Stephens2020)), including left share of government seats (share of seats in parliament held by left parties in the most recent government as a percentage of all seats held by the government), left share of parliamentary seats (share of seats in parliament won by left parties in the most recent election) and a cumulative (starting from 1946) version of left share of government seats (cumulative share of seats in parliament held by left parties as a percentage of all seats held by the government). As Brady et al. (Reference Brady, Huber and Stephens2014: 39) point out, parties are categorized as “left, centre or right, with stances on social policy being a key dimension of differentiation.” Data for these measures are based on the International Almanac of Electoral History (Mackie and Rose, Reference Mackie and Rose1991) and the Political Data Yearbooks published by the European Journal of Political Research. To measure the percentage growth rate of population, I use data on the size of population (in thousands) from Brady et al. (Reference Brady, Huber and Stephens2020).
In estimating the taxation of wealth, I follow Norregaard (Reference Norregaard2013) and Andrews et al. (Reference Andrews, Caldera Sánchez and Johansson2011) and control for income per capita, economic growth, capital account openness (Chinn and Ito (Reference Chinn and Ito2008)’s index) as well as trade openness (imports and exports as percentage of GDP), available from the Comparative Welfare State Data Set (Brady et al., Reference Brady, Huber and Stephens2020). Furthermore, given the weight of housing in households’ total consumption spending, I also control for the consumer price index (CPI). In estimating the returns on housing and financial wealth, I not only retain these macroeconomic conditions but also further control for the risk premium (available from Jordà et al., Reference Jordà, Katharina Knoll, Schularick and Taylor2019), as well as current account inflow as percentage of GDP, the latter echoing Mian and Sufi (Reference Mian and Sufi2018)’s suggestion that the influx of capital may facilitate an expansion in asset supply by channeling international savings into the domestic financial system. Later in the analysis, I also further control for stock market and house prices, which have more limited data.
Findings
Before examining the relative difference between taxes on financial and housing wealth, I first briefly explore how left government partisanship affects these two taxes separately. To increase the robustness of findings, I use both fixed effects and Prais-Winsten panel corrected standard errors (PCSE) estimators. Hypothesis 1 implies that when population growth is lower, left governments are more likely to increase taxes on financial wealth but less likely to increase taxes on housing wealth. In other words, on financial wealth taxation, there should be a negatively signed interaction effect between left partisanship and population growth, while on housing wealth taxation the interaction should be positively signed instead. In Model 1 of Table 1, the dependent variable is the effective tax rate on financial wealth. Consistent with expectation, the interaction between left partisanship and population growth is indeed negatively signed. While Model 1 uses fixed effects, Model 2 uses the Prais-Winsten PCSE estimator, and the core finding of a negatively signed interaction effect continues to hold. Model 3 turns instead to the effective tax rate on housing wealth as the dependent variable, and consistent with expectation, the interaction between left government partisanship and population growth is now positively signed. Based on Models 1 and 3 as an example, the left and right panel of Figure 4 plot the marginal effect of one standard deviation increase in left partisanship on the effective tax rate on respectively financial and housing wealth, conditional on the rate of population growth, with the shaded area marking the 95 per cent confidence interval.
Table 1. Taxing Financial vs Housing Wealth, 15 Advanced Economies
*p<0.1; **p<0.05; ***p<0.01.
Figure 4. Left Partisanship Effect on Financial versus Housing Wealth Taxation.
The two panels show a clear contrast in the pattern of left partisanship effect on financial versus housing wealth taxation: as the rate of population growth becomes lower, the effect of left government partisanship on financial wealth taxation becomes increasingly positive, but the effect on housing wealth taxation becomes increasingly negative. Having now separately examined the left partisanship effect on the level of financial and housing wealth taxation, I turn to the relative difference between these two taxes, which is the main focus of H1. In Model 4, the dependent variable is the “wedge” between taxes on financial and housing wealth, that is, the effective tax rate on financial wealth minus the effective tax rate on housing wealth. Because the tax rates are expressed as percentages, so is the wedge between them. According to H1, left governments are more likely to increase the “tax wedge” between financial and housing wealth when population growth is low. In other words, on the financial/housing tax wedge, there should be a negatively signed interaction effect between left partisanship and population growth. This is consistent with the finding in Model 4. Based on Model 4, Figure 5 plots the marginal effect of one standard deviation increase in left partisanship on the financial/housing tax wedge, conditional on the rate of population growth.
Figure 5. Effect of Left Government Partisanship on Financial/Housing Tax Wedge.
As the figure shows, left governments are more likely to increase the financial/housing tax wedge when population growth is low. For example, at the average rate of population growth in the data (0.6%), left governments have no effect on the tax wedge. As the rate of population growth dips below average, left governments start to have an increasingly positive effect on the tax wedge. At 0.1 per cent population growth (corresponding to the level in Spain in 2016), for instance, each standard deviation increase in left government partisanship will increase the tax wedge by 1.56 per cent. When the rate of population growth falls to -0.5 per cent (close to the level in Greece), the same increase in left government partisanship will now increase the tax wedge by 4.59 per cent. On the other hand, as the rate of population growth starts to climb above average, left governments start to shift the tax wedge in the opposite direction. For example, at one per cent population growth, one standard deviation increase in left government partisanship will lower the tax wedge by 2.99 per cent. At 2 per cent population growth, the same increase in left government partisanship will lower the tax wedge by 8.04 per cent. To reflect the possibility that governments’ taxation policies may also be influenced by the general revenue needs of government spending and the deficit realities of the budget (Beramendi and Rueda, Reference Beramendi and Rueda2007), Model 5 adds total government expenditure and government budget deficit (both as percentages of GDP) as two additional control variables, and the core finding of a negative interaction effect on the financial/housing tax wedge continues to hold, consistent with the prediction from hypothesis H1.
Having established how left governments adjust the financial/housing wealth tax wedge, I now explore the implications for wealth outcomes, focusing in particular on the circumstance under which left governments “tilt the balance” from financial to housing wealth (H2) or “shrink the size” of overall household wealth (H3). To start off, I first directly examine how the tax wedge affects the wealth returns. In Model 1 of Table 2, the dependent variable is the excess return on equity over housing wealth (the real return on equity minus the real return on housing wealth), and I enter the financial/housing wealth tax wedge as the key independent variable of interest. Because the number of observations with available data on both the tax wedge and wealth returns is more limited, to preserve N Model 1 only includes the basic macroeconomic controls, including capital account openness, trade openness, the risk premium, as well as income per capita. Consistent with expectation, a higher financial/housing tax wedge indeed reduces the excess return on equity over housing wealth. More specifically, each percentage increase in the tax wedge can lower the excess return on equity by .19 percentage points. The finding is similar when I use the excess return on bonds over housing as the dependent variable.
Table 2. Rates of Return on Financial Relative to Housing Wealth, 16 Advanced Economies
*p<0.1; **p<0.05; ***p<0.01.
Having shown that an increase in the tax wedge tends to lower the return on financial relative to housing wealth, and that left governments are more likely to increase the tax wedge when population growth is low, I now directly examine the extent to which left governments “tilt the balance” on the return on financial relative to housing wealth, conditional on the rate of population growth (H2). In Model 2, the dependent variable is the excess return on equity over housing wealth, and left government partisanship is measured as contemporaneous left government seat share. According to hypothesis H2, left government partisanship is more likely to reduce the excess return on financial over housing wealth when population growth is low. In other words, on the equity/housing return gap, there should be a positively signed interaction effect between left government partisanship and population growth. This is indeed consistent with the finding from Model 2. While Model 2 uses fixed effects, the core finding remains unchanged when I use the Prais-Winsten PCSE estimator instead. Model 3 re-estimates Model 2, using the average of excess returns on equity, bonds and bills as a measure of the overall excess return on financial over housing wealth, with a similar finding. The finding also remains unchanged when I use instead the PCSE estimator. Model 4 further controls for the index of stock market prices from Jordà et al (Reference Jordà, Schularick, Taylor, Eichenbaum and Parker2017) and the house price index from Cesa-Bianchi et al. (Reference Cesa-Bianchi, Felipe Cespedes and Rebucci2015). Because these two additional variables have more limited data, N drops to 353, but the core finding of a positively signed interaction effect between left partisanship and population growth continues to hold. Using Model 4 as an example, Figure 6 plots the marginal effect of one standard deviation increase in left government partisanship on the excess return on equity over housing wealth, conditional on the rate of population growth.
Figure 6. Effect of Left Government Partisanship on Excess Return on Equity over Housing Wealth.
As the figure shows, left government partisanship is more likely to lower the excess return on equity when population growth is low. For example, at the average rate of population growth in the data (0.6%), left government partisanship has no effect on the excess return. As the rate of population growth dips below average, left government partisanship starts to have an increasingly negative effect on the excess return on equity. At 0.2 per cent population growth, for instance, each standard deviation increase in left government partisanship will lower the excess return on equity over housing assets by 3.82 percentage points. When the rate of population growth falls to -0.5 per cent, the same increase in left government partisanship will lower the excess return by 6.54 percentage points. On the other hand, this effect is diminished and eventually reversed as the rate of population growth increases. Model 5 measures left government partisanship using cumulative instead of contemporaneous left government seat share, and the core finding of a positive interaction with population growth remains unchanged, consistent with the prediction from H2 that left governments are more likely to “tilt the balance” from financial to housing wealth when population growth is low.
Next, I turn to H3 and examine the extent to which left governments “shrink the size” of overall household wealth, conditional on population growth. Because housing wealth accounts for around 80 per cent of the variation in overall household wealth (Rognlie, Reference Rognlie2014, Reference Rognlie2015) I start by examining housing wealth. In Model 6, the dependent variable is the ratio of housing wealth to gross national income. According to H3, left government partisanship is more likely to reduce the wealth-to-income ratio when population growth is high. In other words, there should be a negatively signed interaction effect between left government partisanship and population growth. This is indeed consistent with the finding from Model 6. The finding remains unchanged when I use the ratio of housing wealth to disposable income, or measure left partisanship as left parliamentary rather than government seat share. In Model 7, the dependent variable is the ratio of overall household wealth to disposable income in the economy, and again consistent with H3, the interaction effect between left partisanship and population growth is negatively signed. Based on Model 7, Figure 7 plots the marginal effect of one standard deviation increase in left government partisanship on the overall wealth-to-income ratio, conditional on the rate of population growth.
Figure 7. Effect of Left Government Partisanship on Overall Wealth to Income Ratio.
As the figure shows, left government partisanship is more likely to reduce the overall wealth-to-income ratio when population growth is high. For example, at the average rate of population growth (0.6%), left government partisanship has no effect on the wealth-to-income ratio. As the rate of population growth climbs above average, however, left partisanship starts to have an increasingly negative effect on the wealth-to-income ratio. At 1 per cent population growth, for instance, each standard deviation increase in left government partisanship will lower the wealth-to-income ratio by 0.93. At 1.5 per cent population growth, the same increase in left government partisanship will lower the wealth-to-income ratio by 1.45, which is equivalent to one standard deviation in the wealth-to-income ratio (1.47). On the other hand, this effect is diminished and slightly reversed as the rate of population growth falls below average. When I use the ratio of household wealth to gross national income instead, the core finding of a negative interaction effect between left partisanship and population growth is unchanged, consistent with the prediction from H3 that left governments are more likely to “shrink the size” of overall household wealth when population growth is high.
Conclusion
In affluent democracies, a broad rise in wealth concentration since the 1980s has not been accompanied by a broad rise in wealth taxation (Elässer et al., Reference Elässer, Fastenrath and Rehm2023; Piketty et al., Reference Piketty, Saez and Zucman2023; Zucman, Reference Zucman2019). Instead, as a large literature convincingly points out, conditions including increasing financialization, tax competition and growing scales of tax avoidance have all shifted the balance of political power in favour of financial capital, forcing left governments to converge with the right in not broadly increasing taxes on wealth (Lierse, Reference Lierse2021; Saez and Zucman, Reference Saez and Zucman2019; Mathisen, Reference Mathisen2024; Cobham and Janský, Reference Cobham and Janský2018; Clausing, Reference Clausing2016; Tørsløv et al., Reference Tørsløv, Wier and Zucman2023).
Complementing this perspective, the current article argues that even if the political power of financial capital prevents left governments from broadly increasing taxes on wealth overall, such governments continue to attempt to mitigate the inequality from wealth concentration more subtly, by adjusting the relative difference by which different types of wealth are taxed. In particular, as most advanced economies enter an era of slowing population growth, financial wealth of the rich tends to gain at the expense of middle-class housing wealth (Jakobsen et al., Reference Jakobsen, Jakobsen, Kleven and Zucman2020; Wolff, Reference Wolff2017; Fagereng et al., Reference Fagereng, Guiso, Malacrino and Pistaferri2020; Kuhn et al., Reference Kuhn, Schularick and Isabel Steins2020). To counter this source of inequality, left governments will tilt the balance of wealth toward housing by increasing taxes on financial relative to housing wealth. Consistent with this argument, the article has analyzed data from 15–16 advanced economies and shown that left governments indeed tend to increase taxes on financial relative to housing wealth when population is low, but tax housing more heavily instead when population growth is high. Furthermore, the article has also drawn out the distributive implications, showing that when population growth is low, left government partisanship tends to reduce the return on financial relative to housing wealth; when population growth is high, left partisanship reduces the overall wealth-to-income ratio in the economy instead. More broadly, these findings imply that, as most advanced economies enter an era of weaker population growth, “tilting the balance” may become an increasingly important redistributive strategy for left governments.
The argument that left-leaning governments are increasingly likely to favour housing wealth at the expense of financial wealth provides one theoretical framework to interpret the decision by Canada’s minority Liberal government (which depended on the left-leaning New Democratic Party for support) to increase, from one half to two thirds, the inclusion rate for capital gains tax (which is one component of the tax revenue covered by McDaniel’s (Reference McDaniel2007) effective tax rate on financial capital income) in the 2024 federal budget (Al Mallees, Reference Nojoud2024). In particular, the finance minister justified the measure partly on the ground that it will contribute to the objective of building four million additional homes and helping younger Canadians to attain home ownership. Nevertheless, the long-term political implications for left governments from an expansion in housing wealth may not be straightforward. Because housing wealth helps households smooth consumption against income volatilities, an expansion of housing wealth may potentially narrow the political support base for traditional welfare state spending, thus weakening a primary foundation of electoral support for left governments (Ansell, Reference Ansell2014; Schwartz, Reference Schwartz2008; Schwartz and Seabrooke, Reference Schwartz and Seabrooke2008).
This political risk is less prominent in an old era of higher population growth, because, as the article has shown, under high population growth left governments tend to tax housing wealth more heavily. By driving down the return on housing assets, such a strategy may in fact further cement electoral support for welfare state spending. However, today most advanced economies face the prospect of low or even negative population growth, and as this article has argued, such a demographic context increases the redistributive pressure on left governments to treat housing wealth favourably. By boosting the return on housing wealth, this strategy may nevertheless also weaken electoral support for traditional welfare spending in the long run, thus complicating left governments’ electoral calculations. More specifically, by sharpening the conflict between housing wealth and traditional welfare spending, today’s era of slowing population growth may further increase the difficulty for left governments to maintain an electoral coalition between the working class and middle class. This will be an important direction for future research.
From a broader theoretical perspective, besides growing wealth inequality, today’s advanced economies also face the challenges of climate change as well as rising anti-austerity populism (Baccini and Sattler, forthcoming), and recent theoretical work has argued that these challenges all tend to come in the form of dilemmas (for example, choosing between climate and economic growth, or choosing between economic stimulus and deficit reduction) that rule out drastic policy reforms (Bassetto et al., Reference Bassetto, Huo and Ríos-Rull2024; Angeletos et al., Reference Angeletos, Lian and Wolf2024). As a result, the type of incremental policy adjustment highlighted in this article’s study of left government tax policies share intuitive similarities with how governments of all stripes cope with other profound challenges. For example, Bassetto et al. (Reference Bassetto, Huo and Ríos-Rull2024) show that procrastination of drastic abatement policies in favor of incremental changes to combat global warming is more likely to be politically and organizationally self-reinforcing; in a similar vein, Angeletos et al. (Reference Angeletos, Lian and Wolf2024) show that incremental fiscal adjustments to reduce government deficits may be economically more self-reinforcing than large upfront fiscal consolidation. In future work, it may be important to more fully investigate if there is indeed a common theoretical mechanism behind the incrementalism scholars identify in tax policy, climate policy and fiscal consolidation policy.
On the other hand, the global constraint on taxing wealth may also face the prospect of loosening. In 2021, more than 130 countries signed a historical agreement on a minimum tax rate of 15 per cent for large corporations regardless of where profits are booked, and in 2024, laws that reflect this agreement started to come into force in the United Kingdom, the European Union and Japan, among others. These laws not only reinforce the 15 per cent agreement but also mandate the collection of “top-up” taxes on firms that use legal loopholes to shift profits abroad (Johnson, Reference Johnson2023). If these reforms consolidate over time, the “no overall increase in wealth taxes” constraint that underlines this article’s argument will become less binding. In this context, it will be important to examine whether the incremental adjustment between “tilting the balance” and “shrinking the size” of wealth will fade in importance, as left governments embrace a more traditional strategy of increasing taxes on wealth overall to counter inequality.
Competing interests
the author declares none.
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