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Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs

Author

Listed:
  • Fabian Kindermann

    () (Universität Bonn)

  • Lukas Mayr

    () (University of Essex)

  • Dominik Sachs

    () (University of Munich)

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.

Suggested Citation

  • Fabian Kindermann & Lukas Mayr & Dominik Sachs, 2018. "Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs," Working Papers 2018-067, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2018-067
    Note: M
    as

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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Kindermann_Mayr_Sachs_2018_inheritance-taxation-wealth-heirs.pdf
    File Function: First version, September 16, 2018
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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. 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

    More about this item

    Keywords

    bequests; taxation; life-cycle; Labor Supply; dynamic scoring;

    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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