Inheritance tax planning with uncertain future payroll expenses: an analytical solution to the optimal choice between full and standard exemption

Markus Diller (), Thomas Späth () and Johannes Lorenz ()
Additional contact information
Markus Diller: University of Passau
Thomas Späth: University of Passau
Johannes Lorenz: University of Passau

Journal of Business Economics, 2019, vol. 89, issue 5, No 4, 599-626

Abstract: Abstract Under the German Inheritance Tax and Gift Tax Act, the transfer of business assets can be exempted from taxation up to 100%. However, this exemption depends on the evolution of the company’s payroll, which is highly uncertain. We model the uncertain nature of payroll evolution using a Geometric Brownian motion. We obtain closed-form solutions for the expected effective exemption and for the expected effective tax rate. We find that the uncertainty effect is most pronounced for moderate negative and positive growth rates. Furthermore, higher uncertainty reduces the value of the effective tax exemption. Also, we find that the (partially progressive) German inheritance tax function by trend promotes standard exemption. The results enable tax planners to make an optimal choice between standard or full exemption and allow for calculating the expected tax burden.

Keywords: Inheritance tax; Preferential tax treatment; Brownian motion (search for similar items in EconPapers)
JEL-codes: C61 D81 H30 K34 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11573-019-00929-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jbecon:v:89:y:2019:i:5:d:10.1007_s11573-019-00929-2

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/11573

DOI: 10.1007/s11573-019-00929-2

Access Statistics for this article

Journal of Business Economics is currently edited by Günter Fandel

More articles in Journal of Business Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().