How do Inheritances Shape Wealth Inequality? Theory and Evidence from Sweden

126 Pages Posted: 15 Jun 2018 Last revised: 31 Mar 2019

See all articles by Arash Nekoei

Arash Nekoei

Harvard University

David Seim

Stockholm University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2019

Abstract

Inheritances reduce relative measures of wealth inequality according to recent evidence from several countries. Using a theoretical model and Swedish administrative data, we first show that this counter-intuitive finding can be explained by high intergenerational wealth mobility and low inheritance inequality relative to wealth inequality. We then exploit two quasi-experiments: randomness in the timing of death and an inheritance tax repeal. We find that the equalizing effect of inheritances is short-lasting and reverted within a decade since less wealthy heirs deplete their inherited wealth rapidly in contrast to more affluent heirs. This depletion represents a constant reduction in annual savings equivalent in size to 10% of the average inheritances amount. 70% of this additional an- nual non-labor income are allocated to consumption (half of it is car purchases) in the first years, compared to 90% in later years. The remaining 30% (or 10%) reflect a considerable albeit declining labor supply elasticity with respect to inheritances. Taken together, our findings suggest that inheritance taxation can reduce long-run wealth inequality solely through the taxation of very large inheritances.

Suggested Citation

Nekoei, Arash and Seim, David, How do Inheritances Shape Wealth Inequality? Theory and Evidence from Sweden (March 28, 2019). Available at SSRN: https://ssrn.com/abstract=3192778 or http://dx.doi.org/10.2139/ssrn.3192778

Arash Nekoei

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

David Seim (Contact Author)

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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