Inheritance Tax Avoidance Through the Family Firm

Isabel Micó-Millán

No 2446, Working Papers from Banco de España

Abstract: This paper demonstrates that family firms act as vehicles for inheritance tax avoidance among wealthy individuals. By leveraging a major tax reform in Catalonia, which widened the tax rate differential between tax-favored and non-tax-favored assets, I study asset-shifting responses to the change in inheritance taxation. To identify causal effects, I use the universe of inheritance tax returns and a difference-in-difference design comparing wealthy descendants to other wealthy heirs who were minimally affected by the policy change. After the tax reform, wealthy descendants inherit substantially more wealth through tax-favored assets. This effect is driven entirely by the top 0.5% of descendants, whose inheritances strongly shift towards equity in family firms. This change in the composition of inheritances is consistent with wealthy testators transferring assets to their firms as capital contributions before their passing. My estimates suggest that Catalonia forgoes 27% of current inheritance and gift tax revenues due to the reclassification of private wealth as business wealth via family firms.

Keywords: inheritance tax; tax avoidance; tax reform; top wealth (search for similar items in EconPapers)
JEL-codes: H24 H26 O23 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2024-12
New Economics Papers: this item is included in nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2446

DOI: 10.53479/38438

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