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

129 Pages Posted: 2 Oct 2018 Last revised: 1 Apr 2019

See all articles by Arash Nekoei

Arash Nekoei

Stockholm University - Institute for International Economic Studies (IIES)

David Seim

Stockholm University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2018

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 annual 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.

Keywords: Consumption, inequality, Inheritance, Labor Supply, Wealth

JEL Classification: D31

Suggested Citation

Nekoei, Arash and Seim, David, How Do Inheritances Shape Wealth Inequality? Theory and Evidence from Sweden (September 2018). CEPR Discussion Paper No. DP13199, Available at SSRN: https://ssrn.com/abstract=3259361

Arash Nekoei (Contact Author)

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

David Seim

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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