Title

Three essays on the estate tax

Date of Award

2001

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

Advisor(s)

Douglas Holtz-Eakin

Keywords

Estate tax, Public finance, Taxation

Subject Categories

Economics | Labor Economics | Social and Behavioral Sciences

Abstract

The United States estate tax has recently attracted a great deal of popular and professional attention, despite the paucity of information regarding its effects on economics behavior. One possible reason for this void in the literature is that it affects relatively few individuals. Thus, while the high marginal tax rates of the estate tax provide substantial incentive for individuals to alter their behavior, the relatively small numbers make empirical work difficult. This collection of essays, utilizing the Health and Retirement Study and state level estate tax variation, provides insight on three previously unexamined topics.

The first essay, "Labor Supply Effects of the Estate Tax" examines the labor supply responses of individuals to the estate tax. As with the familiar income tax, the predicted impact of the tax is ambiguous, a priori, due to conflicting income (raising the estate tax lowers the purchasing power of assets and endowment) and substitution (the price of inheritances rise) effects. However, after controlling for other aspects of the labor force participation decision and employing an instrumental variables procedure to eliminate endogeneity bias from several sources, I find that the estate tax lowers labor force participation. In particular, a 10 percentage point increase in the estate tax lowers labor force participation by between 1.884 and 2.988 percentage points, corresponding to elasticities ranging from -0.0887 to -0.137.

In the second essay, "Distortion Costs of Taxing Wealth Accumulation: Income Versus Estate Taxes" I develop a framework for computing the deadweight loss of a revenue-neutral switch from an estate tax to a capital income tax, focusing on the potential lifetime behavioral responses in anticipation of paying the estate tax, while requiring relatively few parameters to estimate. I conclude that eliminating the estate tax and replacing the revenue with that from a capital income tax will likely enhance economic efficiency. Specifically, using my baseline parameter estimates I estimate that the mean decrease in deadweight loss is $0.018 per dollar of wealth.

In the final essay, "Estate Taxes and Marginal Incentives: Evidence from the Health and Retirement Study" I first design a complex effective estate tax calculator and then apply it to Wave 1 of the Health and Retirement Study. As with more familiar taxes, the effective estate tax rates are less than the statutory estate tax rates that currently frame the policy debate. In particular, I find an effective combined federal and state marginal estate tax rate is 0.53 percent for the sample and 0.85 percent conditional on having a positive expected estate tax liability. Additionally, single individuals face effective estate tax rates over fifty times greater than married couples and entrepreneurs face effective estate tax rates forty percent greater than non-entrepreneurs.

This collection of papers represents a contribution to the literature regarding the effects of taxes on economic behavior. Specifically, these papers substantially broaden the literature on the estate tax and illuminate an identification strategy that can be utilized to further study the estate tax.

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