Bequests and the Estate Tax. A Review of Theory and (New) Evidence

This paper studies the relationship between the estate tax and the size of pre-tax bequests of (wealthy) donors: the micro elasticity of bequests. I do this for the two most popular bequest motives discussed in the literature under which this elasticity may be different from zero: warm glow and altruism. For both motives, I calculate the (theoretical) micro elasticity of bequests over the entire range of plausible parameterizations of preferences taken from the literature, at various points in the wealth distribution, and for two estate tax systems (linear and progressive). I show that the elasticity exhibits several important heterogeneities across the distribution of donors’ wealth. Heterogeneous effects of estate taxation follow if bequests are modeled as a luxury good (warm glow), if the endowments of the children are significant (altruism), or if the estate tax is progressive (warm glow and altruism). Heterogeneous effects of estate taxation do not require heterogeneity in preferences: the heterogeneities directly follow from differences in endowments. In most cases, the elasticity becomes increasingly negative for lower wealth levels. For (very) wealthy donors, the micro elasticity of bequests is not typically negative and large but very weak and positive