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Dead or Alive: An Investigation of the Incidence of Estate and Inheritance Taxes


Lily L. Batchelder


New York University School of Law

Surachai Khitatrakun


Tax Policy Center

October 28, 2008

3rd Annual Conference on Empirical Legal Studies Papers

Abstract:     
This paper considers three questions: (1) the relative burden of wealth transfer taxes on heirs versus donors in a partial equilibrium context, (2) the distributional effects of the estate tax if its burdens are assigned to heirs, and (3) whether the incidence of a wealth transfer tax fundamentally differs depending on whether it is based on the amount transferred (an estate tax) or the amount received (an inheritance tax). The estimates presented are derived by adapting the Urban-Brookings Tax Policy Center Estate Tax Microsimulation Model to incorporate heirs' inherited and non-inherited income based on data from the Survey of Consumer Finance and tabulations from restricted IRS data matching estate tax returns to beneficiaries' income tax returns.

This paper argues, contrary to existing practice, that it is more accurate to allocate wealth transfer tax burdens to heirs as a rough first approximation. It then presents the first estimates of the distribution of federal wealth transfer tax burdens based on this assumption. It finds that the 2009 federal estate tax is highly progressive by various measures of economic income if its burdens are assigned to heirs. It also finds that the estate tax contributes importantly to the progressivity of the tax system overall by partially offsetting the exclusion of inheritances from the income tax base among high-income heirs. The paper then compares the 2009 estate tax to an inheritance tax designed to have roughly the same revenue and distributional effects. It finds that their distributional effects differ at an individual level to a surprisingly large degree. The estimated correlation between the average tax rate on an inheritance under the two approaches is only 0.71 when weighted by inheritance size. Moreover, modifying the 2009 estate tax to account for the number of children of the donor does not narrow these differences. Estate and inheritance taxes thus appear to impose fundamentally different burdens that are robust to our best efforts to eliminate them.

Number of Pages in PDF File: 51

Keywords: inheritance, bequest, gift, wealth transfer, incidence, wealth transfer tax, estate tax, inheritance tax, altruism, strategic bequest, accidental bequest, life cycle saving

JEL Classification: D31, D62, D63, D64, H22, H23, H24, H31, K34

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Date posted: May 16, 2008 ; Last revised: October 31, 2008

Suggested Citation

Batchelder, Lily L. and Khitatrakun, Surachai, Dead or Alive: An Investigation of the Incidence of Estate and Inheritance Taxes (October 28, 2008). 3rd Annual Conference on Empirical Legal Studies Papers. Available at SSRN: http://ssrn.com/abstract=1134113 or http://dx.doi.org/10.2139/ssrn.1134113

Contact Information

Lily L. Batchelder (Contact Author)
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
212-992-8156 (Phone)
Surachai Khitatrakun
Tax Policy Center ( email )
Urban Institute
2100 M Street NW
Washington, DC 20009
United States
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