Working Paper: NBER ID: w7360
Authors: Douglas Holtz-Eakin; John W. Phillips; Harvey S. Rosen
Abstract: One criticism of the estate tax is that it prevents the owners of family businesses from passing their enterprises to their children. The problem is that it may be difficult to pay estate taxes without liquidating the business. A natural question is why individuals with such concerns do not purchase enough life insurance to meet their estate tax liabilities. This paper examines whether and how people use life insurance to deal with the estate tax. We find that, other things being the same, business owners purchase more life insurance than other individuals. However, on the margin, their insurance purchases are less responsive to estate tax considerations and they are less likely to have the wherewithal to meet estate tax liabilities out of liquid assets plus insurance.
Keywords: Estate Tax; Life Insurance; Small Business
JEL Codes: H20; G22; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Business Ownership (L26) | Life Insurance Purchases (G52) |
| Gap in Liquid Assets (G33) | Life Insurance Purchases (G52) |
| Estate Tax Liability (H24) | Life Insurance Purchases (G52) |
| Estate Tax Liability (H24) | Cash Flow Constraint (D25) |
| Cash Flow Constraint (D25) | Life Insurance Purchases (G52) |
| Business Ownership (L26) | Estate Tax Liability (H24) |