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Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs

Kindermann, Fabian and Mayr, Lukas and Sachs, Dominik (2018) Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs. Working Paper. CEPR Discussion Papers. (Unpublished)

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Abstract

The taxation of bequests can have a positive impact on the labor supply of heirs through wealth effects. This leads to an increase in future labor income tax revenue on top of direct bequest tax revenue. We first show in a theoretical model that a simple back-of-the envelope calculation, based on existing estimates for the reduction in earnings after wealth transfers, fails: the marginal propensity to earn out of unearned income is not a sufficient statistic for the calculation of this effect because (i) heirs anticipate the reduction in net bequests and adjust their labor supply already prior to inheriting, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to the implied change in their distribution of net bequests. We quantitatively elaborate the size of the overall revenue effect due to labor supply changes of heirs by using a state of the art life-cycle model that we calibrate to the German economy. Besides the joint distribution of income and inheritances, quasi-experimental evidence regarding the size of wealth effects on labor supply is a key target for this calibration. We find that for each Euro of bequest tax revenue the government mechanically generates, it obtains an additional 9 Cents of labor income tax revenue (in net present value) through higher labor supply of (non-)heirs.

Item Type: Monograph (Working Paper)
Additional Information: Source info: CEPR Discussion Paper No. DP13185
Uncontrolled Keywords: bequests, dynamic scoring, labor-supply, life-cycle, taxation
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 15 Jan 2019 16:04
Last Modified: 15 Jan 2019 16:15
URI: http://repository.essex.ac.uk/id/eprint/23821

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