Wealth, Inheritance and the Estate Tax

Studies | Taxes

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


Conclusion

Wealth mobility is determined by a variety of factors.  Inheritances play only a small role in determining an individual's wealth upon retirement.  Earnings inequality, as a result of inherited and acquired skills, marital sorting and Social Security, are far more important determinants of one's wealth at retirement.  In fact, in the absence of Social Security, inheritances would actually increase wealth equality, but in the presence of Social Security, wealth inequality is increased.  This is because Social Security's regressive tax and progressive benefits affect the saving incentives of lower-income families while having little effect on wealthy families.  The resulting distribution of bequests, and therefore the distribution of the next generation's wealth at retirement, becomes more unequal.

The estate tax generates very little revenue for the federal government.  Because inheritances are only a minor factor determining the wealth distribution among retirees, using the estate tax as a redistributive mechanism is unlikely to have a significant effect on that distribution. Indeed, it may be self-defeating if it slows capital formation: The resulting increase in capital returns would make the rich even richer.


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