Wealth, Inheritance and the Estate Tax

Studies | Taxes

No. 289
Thursday, September 21, 2006
by Jagadeesh Gokhale and Pamela Villarreal


Notes

  1. Wojciech Kopczuk and Emmanuel Saez, "Top Wealth Shares in the United States, 1916-2000: Evidence from Estate Tax Returns," National Bureau of Economic Research, Working Paper No. 10399, March 2004.
  2. Marco Cagetti and Mariacristina De Nardi, "Wealth Inequality: Data and Models," Federal Reserve Bank of Chicago, Working Paper 2005-10, August 17, 2005.
  3. Authors' calculations based on data from the "2004 Survey of Consumer Finances," Federal Reserve Board. Available at http://www.federalreserve.gov/Pubs/oss/oss2/2004/scf2004home.html.  The wealth distributions reported here consider only married households with at least one spouse near retirement age.
  4. Jagadeesh Gokhale, Laurence J. Kotlikoff, James Sefton and Martin Weale, "Simulating the Transmission of Wealth Inequality via Bequests," National Bureau of Economic Research, Working Paper 7183, June 1999; and Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests," Journal of Public Economics, Vol. 79, 2001, pages 93-128.
  5. C.D. Harbury and D.M.W.N. Hitchens, Inheritance and Wealth Inequality in Britain (London: George Allen and Unwin, 1979). Cited in Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests."
  6. Joseph E. Stiglitz, "Distribution of Income and Wealth Among Individuals," Econometrica, Vol. 37, No. 3, pages 382-97.  Cited in Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests."
  7. Calculations based on data from the "2004 Survey of Consumer Finances," Federal Reserve Board. Available at http://www.federalreserve.gov/Pubs/oss/oss2/2004/scf2004home.html.
  8. Ibid.
  9. Bart Ganzert, "Wealthy Woes: Affluent Americans Concerned Heirs Will Face More Challenges," Bizjournal.com, July 28, 2006; based on survey data from U.S. Trust Corporation, "Affluent Survey: 2006," July 2006.
  10. U.S. Trust Corporation, A Portrait of the Affluent in America Today (New York: U.S. Trust Corporation, 1998).
  11. Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests," National Bureau of Economic Research, Working Paper No. 7183, June 1999.  Also, see A.S. Blinder, "Inequality and Mobility in the Distribution of Wealth," Kyklos, Vol. 29, pages 607-38.
  12. This age range was selected based on the assumption that individuals in their 60s have likely accumulated most of their wealth that is obtained from labor earnings.
  13. Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests."  This simulation involved using computer models to contract an "overlapping generations model" to reflect the existing economy on a smaller scale.  The model uses 2000 couples (a 22-year-old male married to a 22-year-old female), where each individual who is killed lives a maximum of 88 years.  Oldsters are killed off at random after age 66, and those whose spouses die first pass their estates on to the surviving spouse, while those whose spouses are no longer living pass their estates on to their children. The bequests are not planned; rather, they are not fully annuitized because of premature death, so the inheritances are random. Each worker was assigned an annual wage of $1 to represent a skill level of 1; future earnings and skill levels are then based on a representative sample of the U.S. population.  The model also assumes a 4 percent rate of return on earnings.  The simulation was closely approximate to actual wealth distribution in the United States: the model indicated that the top 1 percent of retiring households held 32.8 percent of wealth, and actual data from the Survey of Consumer Finances reveals that the top 1 percent of retiring households hold 30.4 percent of wealth.
  14. Anthony Shorrocks, "Income Inequality and Income Mobility," Journal of Economic Theory, Vol. 19, December 1978, pages 376-93; and Young Back Choi, "On the Rich Getting Richer and the Poor Getting Poorer," Kyklos, Vol. 52, No. 2, 1999, pages 239-58.
  15. Bruce Bartlett, "Wealth, Mobility, Inheritance and the Estate Tax," National Center for Policy Analysis, Policy Report No. 235, July 2000; and Greg J. Duncan, Years of Poverty, Years of Plenty (Ann Arbor, Mich.: Survey Research Center, Institute for Social Research, University of Michigan, 1984); Isabel V. Sawhill and Mark Condon, "Is U.S. Income Inequality Really Growing?" Urban Institute, Policy Bites,  June 1992; Thomas L. Hungerford, "U.S. Income Mobility in the Seventies and Eighties," Review of Income and Wealth, Vol. 39, December 1993, pages 403-17; and W. Michael Cox and Richard Alm, By Our Own Bootstraps: Economic Opportunity and the Dynamics of Income Distribution (Federal Reserve Bank of Dallas, 1995).
  16. Bruce Bartlett, "Wealth, Mobility, Inheritance and the Estate Tax."; and Erik Hurst, Ming Ching Luoh and Frank Stafford, "The Wealth Dynamics of American Families, 1984-1994," Brookings Institution, Papers on Economic Activity No. 1, 1998, pages 267-337.
  17. Rudolph C. Blitz and John J. Siegfried, "How Did the Wealthiest Americans Get So Rich?" Quarterly Review of Economics and Finance, Vol. 32, Spring 1992, pages 5-26, as referenced by Bruce Bartlett, "Wealth, Mobility, Inheritance and the Estate Tax."
  18. "The Forbes 400 by the Numbers," Forbes, October 11, 1999, page 10; cited in Bruce Bartlett, "Wealth, Mobility, Inheritance and the Estate Tax."
  19. Joseph Kay, "Forbes 400 List of Richest Americans: Snapshot of Financial Oligarchy," Forbes, September 21, 2004; Available at http://www.wsws.org/articles/2004/sep2004/forb-s27.shtml.
  20. Vincenzo Quadrini, "Entrepreneurship, Saving, and Social Mobility," Review of Economic Dynamics, Vol. 3, January 2000, pages 1-40; cited in Bruce Bartlett, "Wealth, Mobility, Inheritance and the Estate Tax."
  21. Stanley Lebergott, The American Economy: Income, Wealth and Want (Princeton University Press, 1976), pages 190-97; cited in Bruce Bartlett, "Wealth, Mobility, Inheritance and the Estate Tax."
  22. Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests."
  23. Jagadeesh Gokhale et al., "Simulating the Transmission of Wealth Inequality via Bequests." In another model, the effect of progressive taxation was introduced.  While progressive taxation does not change the finding that inheritances reduce wealth inequality absent Social Security, it does change the effect in the presence of Social Security by limiting the wealth accumulation of the poor and the middle class and reducing the flow of bequests to children.  Progressive taxation also imposes a higher burden on high-income households thereby reducing their wealth accumulation.  Hence, progressive taxation reduces wealth inequality only slightly.
  24. Organization for Economic Coordination and Development, "Challenges for Tax Policy in OECD Countries," OECD Economic Outlook, No. 69, Chapter 5, June 2, 2001.  Available at http://www.oecd.org/dataoecd/44/0/2086223.pdf
  25. "Economics A-Z," Economist.  Available at http://economist.com/research/Economics/alphabetic.cfm?LETTER=W#wealthtax.
  26. Barry W. Johnson and Martha Britton Eller, "Federal Taxation of Inheritance and Wealth Transfers," in Robert K. Miller and Stephen J. McNamee, eds., Inheritance and Wealth in America (New York: Plenum Press, 1998), pages 61-90.
  27. Roy G. Blakey and Gladys C. Blakey, "The Revenue Act of 1935," American Economic Review, Vol. 25, December 1935, pages 673-90; Harley L. Lutz, "The Federal Reserve Act of 1935," American Economic Review, Vol. 26, March 1936, pages 161-73; Truman C. Bigham, "Economic Effects of the New Deal Tax Policy," Southern Economic Journal, Vol. 3, January 1937, pages 270-80; Joseph A. Schumpeter, Business Cycles, 2 vols. (New York: McGraw-Hill, 1939), page 1,039.
  28. "Federal Revenues by Source, FY2006," Office of Management and Budget.  Available at http://www.ombwatch.org/budget/pdf/2006Revenues.pdf.
  29. "Frequently Asked Questions about the Estate Tax," Fair Economy.  Available at http://www.faireconomy.org/estatetax/ETFAQ.html.
  30. "New International Survey Shows U.S. Death Tax Rate among Highest," American Council for Capital Formation, July 2005.  If the current estate tax laws are allowed to expire, the United States' top marginal estate tax rate could increase to 55 percent in 2011.
  31. Joel Friedman and Aviva Aron-Dine, "The State of the Estate Tax as of 2006," Center on Budget and Policy Priorities, June 2, 2006.
  32. Geoffrey Brennan, "Death and Taxes: An Attack on the Orthodoxy," Public Finance, Vol. 33, No. 3, 1978, pages 201-23.
  33. Ryan J. Donmoyer, "Estimating Estate Tax Burden Is Troubling Issue for JCT," Tax Notes, Vol. 84, August 2, 1999, pages 651-52. Also, see John A. Miller and Jeffrey A. Maine, "Fundamentals of Estate Tax Planning," Idaho Law Review, Vol. 32, No. 2, 1996, pages 197-252; Christopher Drew and David Cay Johnston, "For Wealthy Americans, Death Is More Certain Than Taxes," New York Times, December 22, 1996.  George Cooper, A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance (Washington, D.C.: Brookings Institution, 1979), page 4; Henry J. Aaron and Alicia H. Munnell, "Reassessing the Role for Wealth Transfer Taxes," National Tax Journal, Vol. 45, June 1992, page 138.  The reason for this disparity is that careful estate planning can virtually eliminate the tax. Thus for most married couples, the estate tax only applies to estates larger than $1.35 million. Beyond that, there are a number of increasingly complex methods for reducing the estate tax burden.
  34. Joseph E. Stiglitz, "Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence," Journal of Political Economy, Vol. 86, April 1978, pages S137-S150.
  35. As Alan Blinder observes, "Estate taxation is not a very powerful weapon in the egalitarian arsenal....The reformer eyeing the estate tax as a means to reduce inequality had best look elsewhere." Alan S. Blinder, "Inequality and Mobility in the Distribution of Wealth," Kyklos, Vol. 29, No. 4, 1976, pages 618-19.

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