Raising the Estate Tax Lowers Aggregate Capital and Output
July 10, 2015
Federal law typically imposes an integrated set of taxes on estates, gifts, and generation-skipping transfers. In 2000, the allowed estate tax implied-exemption level was $675,000 that year, and the marginal federal rate above that amount started at 37% and topped at 55%.
Using several calibrated models, researchers Mariacristina De Nardi of the Federal Reserve Bank of Chicago and Fan Yang of Louisiana State University examined the effects of changes in the estate tax. They found:
- Decreasing the estate tax but keeping the budget neutral through other tax hikes increased aggregate capital and income because the increased savings of the richest are enough to counterbalance the decreased savings of everyone else.
- Raising the exemption level raises aggregate capital and income slightly.
- Lowering the exemption level (more estates are taxed) lowers aggregate capital and income.
- Increasing estate taxes lowers the ability of parents to affect their child's lifetime utility (earnings, income, etc).
De Nardi and Fang concluded that while increasing the estate tax decreases inequality, it reduces total capital and output.
Source: Mariacristina De Nardi and Fan Yang, "Wealth Inequality, Family Background, and Estate Taxation," National Bureau of Economic Research, March 2015.
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