By: Enas Farag
Note: The opinions expressed are those of the author alone and do not reflect an institutional position of the Gardner Institute. We hope the opinions shared contribute to the marketplace of ideas and help people as they formulate their own INFORMED DECISIONS™.
Last week, I attended the Utah Tax Invitational (UTAXI) Conference organized by the David Eccles School of Business at the University of Utah. It was a perfect opportunity to bring together a diverse group of academics, tax experts, and tax policy professionals in one room to discuss their latest work in the tax policy reform arena. It was interesting how some topics were discussed repeatedly in several sessions, such as multinationals‘ profit-shifting to tax havens. It was apparent how tax policy professionals worldwide are searching for innovative ways to enhance the effectiveness of their tax regimes, especially after the Organization for Economic Cooperation and Development (OECD) introduced a global minimum tax on MNEs of 15% as of 2023.[i]
The UTAXI Conference also provides an excellent opportunity for scholars to discuss their ongoing research in a workshop setting to receive comments before publishing their work. I got the chance to attend the discussion of a paper titled “Does a Wealth Tax Improve Equality of Opportunity?”[ii]. The authors utilize Norway’s wealth tax data to estimate the effect of parents’ wealth on children’s labor market outcomes.
It is quite reasonable to expect that some parental characteristics, such as wage level, education level, age, and marital status, impact children’s wage level. That is why the authors control for these factors to produce an unbiased estimate. The researchers found that for every NOK 1 million in net parental wealth, children receive a higher annual wage of NOK 14,000, equivalent to nearly 3% of the average annual wage of children in 2017. This study shows how children born to wealthy parents experience an economic privilege – not only due to capital income realized from their inheritance but also due to improved labor market outcomes compared to their peers from less affluent families. Hence, adopting a wealth tax is one policy tool to reduce income inequality for the next generations.
What I find more intriguing are the mechanisms through which parental wealth translates into higher labor income for children, aside from parental characteristics. The researchers show that children of wealthy parents are more likely to be risk-taking, especially regarding occupational choices. Parental wealth act as a safety cushion enabling children to take more risks.
In my opinion, the impact of parental wealth on human capital formation is a more sound mechanism. Perhaps it is less evident in the Norwegian case, given the high-quality provision of public goods. But in other countries, the U.S. in particular, where higher education institutions are segregated by parental income[iii] and access to quality health care can be a challenge, this mechanism can explain much of the association between parental wealth and children’s wages. I wonder how much more labor income children of wealthy parents realize for every $1 million of net parental wealth if the above analysis is replicated using U.S. data. I assume the effect would be more pronounced than in the Norwegian case.
Enas Faraq is a research associate at the Kem C. Gardner Policy Institute.
[i] OECD releases Pillar Two model rules for domestic implementation of 15% global minimum tax. (2021, December 20th). Organization for Economic Cooperation and Development. Retrieved June 6th, 2022 from https://www.oecd.org/tax/beps/oecd-releases-pillar-two-model-rules-for-domestic-implementation-of-15-percent-global-minimum-tax.htm
[ii] Berg, K. & Hebous, S. (2021). Does a Wealth Tax Improve Equality of Opportunity?. UNPUBLISHED Version. Retrieved from http://nathanseegert.com/utaxi2022material/Berg.pdf
[iii] Chetty, R., Friedman, J. N., Saez, E., Turner, N., & Yagan, D. (2020). Income segregation and intergenerational mobility across colleges in the United States. The Quarterly Journal of Economics, 135(3), 1567-1633.