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A Revisit to the Annuity Role of Estate Tax

Author

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  • Monisankar Bishnu
  • Nick L Guo
  • Cagri Kumru

Abstract

This paper finds that previous conclusions that a uniform lump-sum estate tax could provide annuity income were reached by not including the bequest income that households receive. We argue that since agents leave behind bequest, they should also receive bequest income from their parents. Moreover, the differential timing and sizes of bequest income will generate unequal wealth effects even with the actuarially fair annuity markets. To restore the first best allocations, the government has to adopt an estate tax regime that is no longer uniform: the estate would depend on both the timing and sizes of bequests that households receive. Thus the uniform estate tax no longer bears the annuity role. The paper reemphasizes the importance of accounting for bequest income received by households in any model that discusses intergenerational transfers and related policies.

Suggested Citation

  • Monisankar Bishnu & Nick L Guo & Cagri Kumru, 2018. "A Revisit to the Annuity Role of Estate Tax," ANU Working Papers in Economics and Econometrics 2018-658, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2018-658
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp658.pdf
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    References listed on IDEAS

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    1. Cremer, Helmuth & Pestieau, Pierre, 2001. "Non-linear taxation of bequests, equal sharing rules and the tradeoff between intra- and inter-family inequalities," Journal of Public Economics, Elsevier, vol. 79(1), pages 35-53, January.
    2. Thomas Piketty & Emmanuel Saez, 2013. "A Theory of Optimal Inheritance Taxation," Econometrica, Econometric Society, vol. 81(5), pages 1851-1886, September.
    3. repec:hal:pseose:halshs-00879813 is not listed on IDEAS
    4. Wojciech Kopczuk, 2003. "The Trick Is to Live: Is the Estate Tax Social Security for the Rich?," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1318-1341, December.
    5. Emmanuel Farhi & Iván Werning, 2010. "Progressive Estate Taxation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 635-673.
    6. Frank Caliendo & Nick Guo & Roozbeh Hosseini, 2014. "Social Security is NOT a Substitute for Annuity Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 739-755, October.
    7. Marco Cagetti & Mariacristina De Nardi, 2009. "Estate Taxation, Entrepreneurship, and Wealth," American Economic Review, American Economic Association, vol. 99(1), pages 85-111, March.
    8. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
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    Keywords

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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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