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Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs

Lukas Mayr, Dominik Sachs and Fabian Kindermann
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Lukas Mayr: European University Institute

No 1046, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Taxing bequests not only generates direct tax revenue, but 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. How large is this effect? We use a state of the art life-cycle model that we calibrate to the German economy to answer this question. Our model successfully matches quasi-experimental evidence regarding the size of wealth effects on labor supply. Using this evidence directly for a back of the envelope calculation fails because (i) heirs anticipate the reduction in bequests through taxation and adjust their labor supply already prior to the actual act of bequeathing, and (ii) when bequest receipt is stochastic, even those who ex post end up not inheriting anything respond ex ante to a change in the expected size of bequests. 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 a higher labor supply of (non-)heirs.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-pbe
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Related works:
Chapter: Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs (2018)
Working Paper: Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs (2018) Downloads
Working Paper: Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs (2018) Downloads
Working Paper: Inheritance Taxation and Wealth Effects on the Labor Supply of Heirs (2018) Downloads
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