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The Trick is to Live: Is the Estate Tax Social Security for the Rich?

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  • Wojciech Kopczuk

Abstract

Because estate tax liability usually depends on how long one lives, it implicitly provides annuity income. In the absence of annuity markets, lump-sum estate taxation may be used to achieve the first-best solution for individuals with a sufficiently strong bequest motive. Calculations of the annuity embedded in the U.S. estate tax show that people with $10 million of assets may be effectively receiving more than $100,000 a year financed at actuarially fair rates by their tax payments. According to my calibrations, the insurance effect reduces the marginal cost of funds (MCF) for the estate tax by as much as 30% and the resulting MCF is within the range of estimates for the marginal cost of funds for the income tax.

Suggested Citation

  • Wojciech Kopczuk, 2002. "The Trick is to Live: Is the Estate Tax Social Security for the Rich?," NBER Working Papers 9188, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:9188 Note: PE
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    Cited by:

    1. Wojciech Kopczuk & Joseph P. Lupton, 2007. "To Leave or Not to Leave: The Distribution of Bequest Motives," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 207-235.
    2. Graziella Bertocchi, 2011. "The Vanishing Bequest Tax: The Comparative Evolution Of Bequest Taxation In Historical Perspective," Economics and Politics, Wiley Blackwell, vol. 23(1), pages 107-131, March.
    3. Wojciech Kopczuk, 2013. "Incentive Effects of Inheritances and Optimal Estate Taxation," American Economic Review, American Economic Association, pages 472-477.
    4. Helmuth Cremer & Firouz Gahvari & Pierre Pestieau, 2012. "Accidental Bequests: A Curse for the Rich and a Boon for the Poor," Scandinavian Journal of Economics, Wiley Blackwell, pages 1437-1459.
    5. Garriga, Carlos & Sánchez-Losada, Fernando, 2009. "Indirect taxation and the welfare effects of altruism on the optimal fiscal policy," Economic Modelling, Elsevier, pages 1365-1374.
    6. Helmuth Cremer & Pierre Pestieau, 2011. "The Tax Treatment of Intergenerational Wealth Transfers ," CESifo Economic Studies, CESifo, pages 365-401.
    7. Helmuth Cremer & ) & Pierre Pestieau, 2003. "Wealth Transfer Taxation: A Survey," Public Economics 0311003, EconWPA.
    8. Wenli Li & Pierre-Daniel G. Sarte, 2003. "The macroeconomics of U.S. consumer bankruptcy choice: Chapter 7 or Chapter 13?," Working Papers 03-14, Federal Reserve Bank of Philadelphia.
    9. Ivo Bischoff & Nataliya Kusa, 2015. "Policy preferences for inheritance taxation," MAGKS Papers on Economics 201531, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    10. Ivo Bischoff & Nataliya Kusa, 2016. "Should wealth transfers be taxed? Citizens’ view on a fundamental question," MAGKS Papers on Economics 201636, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    11. Alan J. Auerbach, 2006. "The Future of Capital Income Taxation," Fiscal Studies, Institute for Fiscal Studies, pages 399-420.
    12. Douglas Holtz-Eakin & Donald Marples, 2001. "Distortion Costs of Taxing Wealth Accumulation: Income Versus Estate Taxes," NBER Working Papers 8261, National Bureau of Economic Research, Inc.
    13. James R. Hines, 2013. "Income and Substitution Effects of Estate Taxation," American Economic Review, American Economic Association, vol. 103(3), pages 484-488, May.
    14. Michel Strawczynski, 2014. "The optimal inheritance tax in the presence of investment in education," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 768-795, August.
    15. Hisahiro Naito, 2014. "Pareto-improving Consumption Tax When the Return from Capital is idyosyncratic and (Optimal or non-Optimal) Capital Income Tax is available," Tsukuba Economics Working Papers 2014-004, Economics, Graduate School of Humanities and Social Sciences, University of Tsukuba.
    16. Alan J. Auerbach, 2006. "The Future of Capital Income Taxation," Fiscal Studies, Institute for Fiscal Studies, pages 399-420.
    17. Grochulski, Borys & Piskorski, Tomasz, 2010. "Risky human capital and deferred capital income taxation," Journal of Economic Theory, Elsevier, vol. 145(3), pages 908-943, May.

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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