On the macroeconomic and distributional effects of federal estate tax reforms in the United States

Dirk Van de gaer - Ghent University, Department of Economics, Belgium

Pieter Van Rymenant, Freddy Heylen and Dirk Van de gaer This paper argues that the strong reductions in U.S. federal estate taxes since 1980 have not generated positive effects on labor supply, private capital formation, and economic activity. Rather, these estate tax cuts have contributed considerably to rising after-tax wealth inequality. To study the macroeconomic and distributional effects of estate tax changes over time, we construct and simulate a dynamic general equilibrium OLG model with firms, a fiscal government, and heterogeneous households. Our model also captures the joint taxation of inter-vivos transfers and bequests in the U.S. since 1976. The key underlying result is that the aggregate stocks of pre-tax bequests and wealth are very insensitive to estate tax changes, even when households value after-tax bequests - warm glow. As a result, the yearly foregone estate tax revenues are large, especially in the long run.