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Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs

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  • Kindermann, Fabian
  • Mayr, Lukas
  • Sachs, Dominik

Abstract

The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future 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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  • Kindermann, Fabian & Mayr, Lukas & Sachs, Dominik, 2018. "Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs," CEPR Discussion Papers 13185, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13185
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Two papers on wealth taxation
      by Christian Zimmermann in NEP-DGE blog on 2017-12-09 04:28:27
    2. Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs
      by Christian Zimmermann in NEP-DGE blog on 2018-10-25 03:55:36

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    2. García-Miralles Esteban, 2020. "The Crucial Role of Social Welfare Criteria and Individual Heterogeneity for Optimal Inheritance Taxation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(2), pages 1-16, April.
    3. Koeniger, Winfried & Zanella, Carlo, 2022. "Opportunity and inequality across generations," Journal of Public Economics, Elsevier, vol. 208(C).
    4. Aleh Tsyvinski & Nicolas Werquin, 2017. "Generalized Compensation Principle," NBER Working Papers 23509, National Bureau of Economic Research, Inc.
    5. Andreas THIEMANN & Diana OGNYANOVA & Edlira NARAZANI & Balazs PALVOLGYI & Athena Kalyva & Alexander LEODOLTER, 2021. "Shifting the Tax Burden away from Labour towards Inheritances and Gifts – Simulation results for Germany," JRC Working Papers on Taxation & Structural Reforms 2021-16, Joint Research Centre.
    6. Kindermann, Fabian & Pueschel, Veronika, 2021. "Progressive Pensions as an Incentive for Labor Force Participation," CEPR Discussion Papers 16380, C.E.P.R. Discussion Papers.
    7. Spencer Bastani & Daniel Waldenström, 2021. "Perceptions of Inherited Wealth and the Support for Inheritance Taxation," Economica, London School of Economics and Political Science, vol. 88(350), pages 532-569, April.
    8. Philipp Krug, 2022. "Optimal Estate Taxation: More (about) Heterogeneity across Dynasties," Working Papers 217, Bavarian Graduate Program in Economics (BGPE).
    9. Kindermann, Fabian & Mayr, Lukas & Sachs, Dominik, 2020. "Inheritance taxation and wealth effects on the labor supply of heirs," Journal of Public Economics, Elsevier, vol. 191(C).
    10. Suzanne Bellue & Lukas Mahler, 2024. "Efficiency and Equity of Education Tracking A Quantitative Analysis," CRC TR 224 Discussion Paper Series crctr224_2024_546, University of Bonn and University of Mannheim, Germany.
    11. Alexander Krenek & Margit Schratzenstaller-Altzinger & Klaus Grünberger & Andreas Thiemann, 2021. "INTAXMOD – Inheritance and Gift Taxation in the Context of Ageing," WIFO Working Papers 645, WIFO.
    12. Lukas Mahler & Minchul Yum, 2024. "Lifestyle Behaviors and Wealth‐Health Gaps in Germany," Econometrica, Econometric Society, vol. 92(5), pages 1697-1733, September.
    13. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.
    14. Christopher W. Kulp & Michael Kurtz & Charles Hunt & Matthew Velardi, 2023. "The distribution of wealth: an agent-based approach to examine the effect of estate taxation, skill inheritance, and the Carnegie Effect," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(2), pages 397-415, April.
    15. Belan Pascal & Moussault Erwan, 2020. "Inheritance Taxation in a Model with Intergenerational Time Transfers," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 20(1), pages 1-19, January.
    16. Dominik Bernhofer & Michael Ertl & Petra Innreiter & Pascal Schraml & Eva Six & Max Wehsely, 2024. "Ausgestaltung und Herausforderungen einer modernen Erbschafts- und Schenkungssteuer in Österreich," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 50(1), pages 43-81.
    17. Margit Schratzenstaller, 2023. "Behavioral Responses to Inheritance Taxation. A Review of the Empirical Literature," WIFO Working Papers 668, WIFO.

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    More about this item

    Keywords

    Bequests; Taxation; Life-cycle; Labor-supply; Dynamic scoring;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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