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Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs

Fabian Kindermann, Lukas Mayr, Dominik Sachs


This chapter is a preliminary draft unless otherwise noted. It may not have been subjected to the formal review process of the NBER. This page will be updated as the chapter is revised.

Chapter in forthcoming NBER book Trans-Atlantic Public Economics Seminar 2018, Hilary W. Hoynes, Camille Landais, and Johannes Spinnewijn, organizers
Conference held June 4-5, 2018
Forthcoming from Elsevier, Journal of Public Economics

The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in labor income tax revenue on top of direct bequest tax revenue. We first show in a theoretical model that a simple back-of-the-envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to the implied change in their distribution of net bequests. We quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state-of-the-art life-cycle model that we calibrate to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 cents of labor income tax revenue (in net present value) through higher labor supply of (non-)heirs.

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Document Object Identifier (DOI): 10.1016/j.jpubeco.2019.104127

This chapter first appeared as NBER working paper w25081, Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs, Fabian Kindermann, Lukas Mayr, Dominik Sachs
 
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