The Elasticity of Taxable Savings

This paper estimates the effect of taxation on household savings using the Dutch 2001 capital-income and wealth tax reform as an instrument. The reform creates quasi-experimental variation in the rate of return after taxes at each level of income and wealth. The impact of the reform on the Dutch population is highly asymmetric. This allows me to estimate the causal effect of a change in the rate of return on savings, using a difference-in-difference framework where I compare households that are similar in terms of income and wealth, but that where nevertheless treated differently by the tax reform. I use administrative household panel data from 1995-2004 with information on capital income, wealth and portfolio composition, created from tax data. The results show that a reform-induced increase in the rate of return, leads to a significant increase in savings. However, the effect size is economically modest. Results indicate that a 1 percent increase in the current Dutch wealth tax of 1.2 percent, leads to a reduction in household savings of between 0.10-0.17 percent, depending on the specification and the sample. Overall, the results indicate that capital-income and wealth taxation in the Netherlands are not very distortive.