Working Paper: CEPR ID: DP13199
Authors: Arash Nekoei; David Seim
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: inheritance; inequality; wealth; consumption; labor supply
JEL Codes: D31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inheritances (D14) | relative measures of wealth inequality (short run) (D31) |
| inheritances (D14) | relative measures of wealth inequality (long run) (D31) |
| depletion of inherited wealth (D14) | annual savings (G51) |
| inheritances (D14) | consumption (E21) |
| inheritances (D14) | car purchases (first years) (G51) |
| inheritances (D14) | other commodities (later years) (Q02) |
| inheritances (D14) | labor supply (J20) |
| inheritance taxation (H24) | long-run wealth inequality (D31) |
| inheritances (D14) | likelihood of being in top wealth percentiles (D31) |
| depletion of inherited wealth (D14) | long-run increase in wealth inequality (D31) |