The impact of bequest taxation on savings and transfers

• Authors: Janusz Kudła , Robert Kruszewski , Maciej Dudek , Konrad Walczyk

Abstracts

EN

Research background: The paper investigates the impact of bequest taxation on saving and transfers when parents and children make decisions consistently. It complements the predictions of Gale and Perozek's life-cycle modeling (2001) when decisions of parents and children are set independently and can be time-inconsistent. Purpose of the article: The paper strives to answer the question of whether taxation of bequest harms savings and inter vivos transfers. The previous results indicated that this is possible for some bequest motives. Our results show that this is not likely for the most typical values of parameters. Methods: The analysis involves economic modeling of four bequest motives: altruistic, paternalistic, accidental, and exchange. The method is based on the overlapping generation approach and life-cycle approach in the case of a paternalistic bequest. The results are supplemented with numerical simulations. Findings & value added: For the altruistic motive, savings are smaller if interest rates are low relative to the tax rate and the utility of one's consumption is more valuable than the utility of the next generations. For the accidental motive, savings decrease with small interest rates, high taxation and long-life expectancy. For the paternalistic motive, savings decrease when the interest rate and the value of future utility are low. For the exchange motive, savings are higher after a tax increase, but it depends on the value of attention and life expectancy. The general conclusion is that higher bequest taxation hamper saving behavior and may disturb the intergenerational exchange process. The bequest tax should, therefore, be set low, especially for aging populations, in order to induce higher savings and force the young to provide the elderly with higher attention.

Keywords

EN

saving; inheritance tax; bequest; overlapping generation; life cycle

• Publisher: Instytut Badań Gospodarczych
• Journal: Equilibrium. Quarterly Journal of Economics and Economic Policy
• Year: 2023
• Volume: 18
• Issue: 2
• Pages: 333-365

Dates

published

2023

Contributors

author

Janusz Kudła

• University of Warsaw

• https://orcid.org/0000000324856877

author

Robert Kruszewski

• Warsaw School of Economics

• https://orcid.org/0000000242369434

author

Maciej Dudek

• University of Michigan

• https://orcid.org/0000000281349794

author

Konrad Walczyk

• University of Warsaw

• https://orcid.org/0000000168862385

References

• Abel, A. B. (1985). Precautionary saving and accidental bequests. American Economic Review, 75(4), 777–791.
• Abraham, M., Lorek, K. Richter, F., & Wrede, M. (2018). Breaking the norms: When is evading inheritance taxes socially acceptable? European Journal of Political Economy, 52, 85–102. doi: 10.1016/j.ejpoleco.2017.05.003.
• Altonji, J. G., Hayashi, F., & Kotlikoff, L. J. (1992). Is the extended family altruisti-cally linked? Direct tests using micro data. American Economic Review, 82(5), 1177–1198.
• Andreoni, J. (1990). Impure altruism and donations to public goods: A theory of warm-glow giving? Economic Journal, 100(401), 464–477. doi: 10.2307/2234133.
• Bastani, S., & Waldenström, D. (2021). Perceptions of inherited wealth and the support for inheritance taxation. Economica, 88(350), 532–569. doi: 10.1111/ecca. 12359.
• Becker, G. S. (1974). A theory of social interactions. Journal of Political Economy, 82(6), 1063–1093. doi: 10.1086/260265.
• Becker, G. S., & Tomes, N. (1979). An equilibrium theory of the distribution of income and intergenerational mobility. Journal of Political Economy, 87(6), 1153–89. doi: 10.1086/260831.
• Bernheim, B. D., Shleifer, A., & Summers, L. H. (1985). The strategic bequest mo-tive. Journal of Political Economy, 93(6), 1045–1076.
• Bernheim, B. D. (1989). Intergenerational altruism, dynastic equilibria and social welfare. Review of Economic Studies, 56(1), 119–128. doi: 10.2307/2297753.
• Bevan, D. L., & Stiglitz, J. E. (1979). Intergenerational transfers and inequality. Greek Economic Review, 1(1), 8–26.
• Boadway, R., & Cuff, K. (2015). Tax treatment of bequests when donor benefits are discounted. International Tax and Public Finance, 22, 604–634. doi: 10.1007/s10797-015-9366-z.
• Bricker, J., Dettling. L. J., Henriques, A., Hsu, J. W., Jacobs, L., Moore, K. B., Pack, S., Sabelhaus, J., Thompson, J., & Windle, R. A. (2017). Changes in U.S. family finances from 2013 to 2016: Evidence from the Survey of Consumer Finances. Federal Reserve Bulletin, 103(3), 1–42. doi: 10.17016/bulletin.2017.103-3.
• Casamatta, G. (2023). On the desirability of taxing bequests. Journal of Economics, 138, 195–219. doi: 10.1007/s00712-022-00809-4.
• Causa, O., & Hermansen, M. (2019). Income redistribution through taxes and trans-fers across OECD countries. Economic Department Working Papers, 1453.
• Cox, D. (1987). Motives for private income transfers. Journal of Political Economy, 95(3), 508–546. doi: 10.1086/261470.
• Cremer, H., & Pestieau, P. (2011). The tax treatment of intergenerational wealth transfers. CESifo Economic Studies, 57(2), 365–401. doi: 10.1093/cesifo/ifr014.
• Davies, J. B. (1981). Uncertain lifetime, consumption, and dissaving in retirement. Journal of Political Economy, 89(3), 561–77. doi: 10.1086/260986.
• Davies, J. B., & Shorrocks, A. F. (2000). The distribution of wealth. In A. B. Atkin-son & F. Bourguignon (Eds). Handbook of income distribution, vol. 1 (pp. 605–675). Oxford: Elsevier.
• Drometer, M., Frank, M., Pérez, M. F., Rhode, C., Schworm, S., & Stitteneder, T. (2018). Wealth and inheritance taxation: An overview and country comparison. Ifo DICE Report, 16(02), 45–54.
• Ferrara, I., & Missios, P. (2020). Trust, ability‐to‐pay, and charitable giving. Journal of Public Economic Theory, 22(3), 583–629. doi: 10.1111/jpet.12393.
• Gale, W. G., & Perozek, M. G. (2001). Do estate taxes reduce saving? In W. G. Gale, J. R. Hines & J. Slemrod (Eds.). Rethinking estate and gift taxation (pp. 216–257). Washington: Brookings Institution Press.
• Glazer, A., Kanniainen, V., & Niskanen, E. (2003). Bequests, control rights, and cost–benefit analysis. European Journal of Political Economy, 19, 71–82. doi: 10.1016 /S0176-2680(02)00130-1.
• Glogowsky, U. (2021). Behavioral responses to inheritance and gift taxation: Evi-dence from Germany. Journal of Public Economics, 193, 104309. doi: 10.1016/ j.jpubeco.2020.104309.
• Glomm, G., & Ravikumar, B. (1992). Public versus private investment in human capital: Endogenous growth and income inequality. Journal of Political Economy, 100(4), 818–834. doi: 10.1086/261841.
• Gross, C., Lorek, K., & Richter, F. (2017). Attitudes towards inheritance taxation–results from a survey experiment. Journal of Economic Inequality, 15(1), 93–112. doi: 10.1007/s10888-016-9344-4.
• Hines, J. R., Potrafke, N., Riem, M., & Shinke, C. (2019). Inter vivos transfers of ownership in family firms. International Tax and Public Finance, 26, 225–256 doi: 10.1007/s10797-018-9508-1.
• Hurd, M. D. (1987). Savings of the elderly and desired bequests. American Economic Review, 77(3), 298–312.
• Hurd, M. D. (1989). Mortality risk and bequests. Econometrica, 57(4), 779–813. doi: 10.2307/1913772.
• Klevmarken, N. A. (2004). On the wealth dynamics of Swedish families, 1984–98. Review of Income and Wealth, 50(4), 469–491. doi: 10.1111/j.0034-6586.2004.00136.x.
• Kopczuk, W. (2009). Economics of estate taxation: A brief review of theory and evidence. Tax Law Review, 63(1), 139–157. doi: 10.3386/w15741.
• Kopczuk, W. (2013). Taxation of intergenerational transfers and wealth. In A. J. Auerbach, R. Chetty & E. Saez (Eds.). Handbook of public economics 5 (pp. 329–390). Elsevier.
• Kotlikoff, L. J., & Spivak, A. (1981). The family as an incomplete annuities market. Journal of Political Economy, 89(2), 372–391. doi: 10.1086/260970.
• Leroux, M. L., & Pestieau, P. (2022). Age-related taxation of bequests in the pres-ence of a dependency risk. Journal of Public Economic Theory, 24(1), 92–119. doi: 10.11 11/jpet.12539.
• Niimi, Y. (2019). The effect of the recent inheritance tax reform on bequest behav-iour in Japan. Fiscal Studies, 40(1), 45–70. doi: 10.1111/1475-5890.12181.
• Nordblom, K., & Ohlsson, H. (2006). Tax avoidance and intra-family transfers. Journal of Public Economics, 90(8-9), 1669–1680. doi: 10.1016/j.jpubeco.2005.10.005.
• Piketty, T. (2011). On the long-run evolution of inheritance: France 1820-2050. Quarterly Journal of Economics, 126(3), 1071–1131. doi: 10.1093/qje/qjr020.
• Piketty, T., & Saez, E. (2013). A theory of optimal inheritance taxation. Econometri-ca, 81(5), 1851–1886. doi: 10.3982/ECTA10712.
• Saez, E., & Zucman, G. (2016). Wealth inequality in the United States since 1913: Evidence from capitalized income tax data. Quarterly Journal of Economics, 131(2), 519–578. doi: 10.1093/qje/qjw004.
• Spiteri, J., & von Brockdorff, P. (2022). Household wealth and inheritance transfers: Evidence from the Euro Area. Journal of Family and Economic Issues, 2022. doi: 10.1007/s10834-022-09861-0.
• Takaaki, A., Nishimura, K., & Makoto, Y. (2019). Two-sided altruism and time inconsistency. Studies in Nonlinear Dynamics and Econometrics, 23(4), 1–10. doi: 10.1515/snde-2019-0022.
• Tsoutsoura, M. (2015). The effect of succession taxes on family firm investment: Evidence from a natural experiment. Journal of Finance, 70, 649–688. doi: 10.1111/jofi.12224.
• Uchida, Y., & Ono, T. (2021). Political economy of taxation, debt ceilings, and growth. European Journal of Political Economy, 68, 101996. doi: 10.1016/j.ejpoleco. 2020.101996.
• Yaari, M. E. (1965). Uncertain lifetime, life insurance, and the theory of the con-sumer. Review of Economic Studies, 32(2), 137–150. doi: 10.2307/2296058.

Identifiers

DOI

10.24136/eq.2023.010

Biblioteka Nauki

22400106