On the macroeconomic and distributional effects of federal estate tax reforms in the United States

Pieter Van Rymenant, Freddy Heylen and Dirk Van de gaer

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper studies the effects of the sharp decline since 1980 in U.S. federal estate taxes on the past and future evolution of per capita growth, labor supply, the wealth-to-GDP ratio (capital-output ratio), the real interest rate, and cross-sectional wealth inequality and concentration. To do so, we construct, calibrate, and simulate a dynamic general equilibrium model featuring firms, a fiscal government, and overlapping generations of heterogeneous households connected via bequests and inter-vivos transfers. The model includes crucial elements in the debate on the effects of estate tax changes and accounts for structural developments in recent decades, such as demographic change and ‘skill-biased’ technological progress. It replicates key U.S. data since the 1960s quite well. We find that the studied estate tax reforms have not generated the desired positive effects on labor supply, private capital formation, and economic activity. Rather, they have contributed considerably to rising aftertax wealth inequality and concentration and explain a fraction of the long-term decline in the real interest rate. The key underlying result from our simulations is that the aggregate stocks of pre-tax wealth and pre-tax bequests are insensitive to changes in the estate tax, even when all households have an after-tax bequest motive. As a result, the foregone estate tax revenues are large.

Keywords: Wealth inequality; economic growth; bequests; estate tax; OLG model (search for similar items in EconPapers)
JEL-codes: E17 E21 E27 E62 (search for similar items in EconPapers)
Pages: 127 pages
Date: 2022-09
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-his, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:22/1052

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