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Estate Taxes, Life Insurance, and Small Business

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  • Douglas Holtz-Eakin
  • John Phillips
  • Harvey Rosen

Abstract

One criticism of the estate tax is that it prevents the owners of family businesses from passing their enterprises onto their children. The problem is that it may be difficult to pay estate taxes without liquidating the business. A natural question is why individuals with such concerns do not purchase enough life insurance to meet their estate tax liabilities. This paper examines whether and how people use life insurance to deal with the estate tax. We find that, other things being the same, business owners purchase more life insurance than other individuals. However, on the margin, their insurance purchases are less responsive to estate tax considerations and they are less likely to have the wherewithal to meet estate tax liabilities out of liquid assets plus insurance.

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Bibliographic Info

Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 10.

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Length: 38 pages
Date of creation: Apr 1999
Date of revision:
Handle: RePEc:max:cprwps:10

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References

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  1. B. Douglas Bernheim, 1987. "Does the Estate Tax Raise Revenue?," NBER Working Papers 2087, National Bureau of Economic Research, Inc.
  2. Harold M. Somers, 1958. "Estate Taxes And Business Mergers: The Effects Of Estate Taxes On Business Structure And Practices In The United States," Journal of Finance, American Finance Association, vol. 13(2), pages 201-210, 05.
  3. James P. Smith, 2004. "Racial and Ethnic Differences in Wealth in the Health and Retirement Study," Labor and Demography 0408011, EconWPA.
  4. B. Douglas Bernheim, 1992. "How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," NBER Working Papers 2942, National Bureau of Economic Research, Inc.
  5. James Poterba, 1998. "Estate and Gift Taxes and Incentives for Inter Vivos Giving in the United States," NBER Working Papers 6842, National Bureau of Economic Research, Inc.
  6. Jeffrey Brown, 2001. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Chapters, in: Themes in the Economics of Aging, pages 91-126 National Bureau of Economic Research, Inc.
  7. James M. Poterba & Andrew Samwick, 2001. "Household Portfolio Allocation over the Life Cycle," NBER Chapters, in: Aging Issues in the United States and Japan, pages 65-104 National Bureau of Economic Research, Inc.
  8. Robert W. Fairlie & Bruce D. Meyer, 1996. "Ethnic and Racial Self-Employment Differences and Possible Explanations," Journal of Human Resources, University of Wisconsin Press, vol. 31(4), pages 757-793.
  9. Alan J. Auerbach & Laurence J. Kotlikoff, 1985. "Life Insurance of the Elderly: Adequacy and Determinants," NBER Working Papers 1737, National Bureau of Economic Research, Inc.
  10. James P. Smith, 2004. "Wealth Inequality Among Older Americans," Labor and Demography 0403003, EconWPA.
  11. James Poterba, 1997. "The Estate Tax and After-Tax Investment Returns," NBER Working Papers 6337, National Bureau of Economic Research, Inc.
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Cited by:
  1. Jeffrey R. Brown, 1999. "Are the Elderly Really Over-Annuitized? New Evidence on Life Insurance and Bequests," NBER Working Papers 7193, National Bureau of Economic Research, Inc.
  2. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
  3. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.
  4. Brunetti, Michael J., 2006. "The estate tax and the demise of the family business," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1975-1993, November.
  5. Henriette Houben & Ralf Maiterth, 2011. "Endangering of Businesses by the German Inheritance Tax? – An Empirical Analysis," BuR - Business Research, German Academic Association for Business Research, vol. 4(1), pages 32-46, March.
  6. William G. Gale & Joel B. Slemrod, 2001. "Rethinking the Estate and Gift Tax: Overview," NBER Working Papers 8205, National Bureau of Economic Research, Inc.

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