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Estate Taxes, Life Insurance, and Small Business

  • Douglas Holtz-Eakin
  • John W. Phillips
  • Harvey S. Rosen

One criticism of the estate tax is that it prevents the owners of family businesses from passing their enterprises to 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7360.

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Date of creation: Sep 1999
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Publication status: published as Holtz-Eakin, Douglas, John W. R. Phillips and Harvey S. Rosen. "Estate Taxes, Life Insurance, And Small Business," Review of Economics and Statistics, 2001, v83(1,Feb), 52-63.
Handle: RePEc:nbr:nberwo:7360
Note: PE
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  1. Fairlie, Robert, 2014. "Ethnic and Racial Self-Employment Differences and Possible Explanations," Santa Cruz Department of Economics, Working Paper Series qt24p7v6gc, Department of Economics, UC Santa Cruz.
  2. 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.
  3. B. Douglas Bernheim, 1986. "Does the Estate Tax Raise Revenue?," NBER Working Papers 2087, National Bureau of Economic Research, Inc.
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  5. 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.
  6. James Poterba, 1997. "The Estate Tax and After-Tax Investment Returns," NBER Working Papers 6337, National Bureau of Economic Research, Inc.
  7. James P. Smith, 2004. "Racial and Ethnic Differences in Wealth in the Health and Retirement Study," Labor and Demography 0408011, EconWPA.
  8. Bernheim, B Douglas, 1991. "How Strong Are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 899-927, October.
  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 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.
  11. 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.
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