This paper examines the trade-offs policymakers face when imposing out-migration taxes to prevent tax flight. Exploiting an increase in the wealth tax rate in Norway at the top of the wealth distribution, we document significant migration responses. The out-migration rate of affected households increased from 0.2% in the pre-period to more than 2% in the year of the reform. Out-migration not only erodes the tax base, but 40% of out-migrating households are firm owners. Firms of out-migrating owners experience, on average, a 12.6% decrease in firm revenues compared with firms whose owners remain.  To analyze the aggregate effects of the reform and the effectiveness of out-migration taxes, we develop a dynamic equilibrium model where heterogeneous entrepreneurs make forward-looking savings and location choices. Entrepreneurs who operate their firm in a different location than their country of residence may incur a haircut to their productivity. Leveraging quasi-experimental evidence from the reform to estimate the key model parameters, our model reveals that the wealth tax reduces aggregate output by 1.3% in the long-run. Introducing a tax on the market value of the firm upon out-migration curbs tax flight, especially among more productive entrepreneurs, and increases aggregate output.

Abstract: We study a size-contingent law in Norway that grants workers the right to board representation in firms with 30 or more employees. To analyze the impact of the law, we embed the regulation into an equilibrium model of the labor market. We show how to use behavioral responses to the regulation to identify (i) the direct effects of the policy on regulated firms and workers, (ii) the distortions from firms adjusting their size to avoid the regulation, and (iii) the equilibrium effects in the labor market. We evaluate these effects on both firms profit and production as well as worker compensation, including wages and non-wage amenities.