Bequests and the estate tax. A review of theory and (new) evidence

This paper studies the theoretical relationship between the estate tax and the size of pre-tax bequests of (wealthy) donors: the micro elasticity of bequests. I start from the two most popular bequest motives discussed in the literature where this elasticity may be different from zero: warm glow and altruism. For both motives, I study the effects of higher estate taxation across the distribution of wealth and over the entire range of plausible parameterizations regarding preferences over consumption and bequests. I consider a linear estate tax, as well as the case of a progressive estate tax characterized by a high exemption, as in the United States today. The first key result is that the micro elasticity of bequests exhibits several important heterogeneities across the distribution of wealth (endowments). Heterogeneous effects of estate taxation follow if bequests are modelled as a luxury good (warm glow), if the endowments of the children are significant (altruism), or if the estate tax system is progressive (warm glow and altruism). The second key result is that, for (very) wealthy donors, and under reasonable parameterizations of preferences, the micro elasticity of bequests is not typically negative and large but may well be positive. These results indicate that there are no reasons to expect large reductions in the pre-tax bequests of (very) wealthy donors, nor to expect large disincentive effects generated by the estate tax. The extra tax revenues generated by the estate tax, by contrast, may be large.