Inter-Vivos Transfers, Bequests and Optimal Estate Taxation

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by Mi Luo, New York University

My dissertation aims to quantitatively study the optimal estate taxation design under a modeling framework that allows agents to transfer wealth both during life (inter-vivos transfers) and at the end of life (end-of-life bequests). Intergenerational transmission of wealth directly affects saving behavior, cross-sectional wealth inequality (especially the top 1 percent) and wealth mobility over generations. However, previous studies, either theoretical or empirical, rarely study the two forms of transfers together, hence potentially bias the optimal tax design. This project builds on my previous joint work (Ameriks, et al. 2016), which shows that inter-vivos transfers contributes significantly to the retirement savings, and tries to answer the policy question of optimal estate taxation.

Intuitively, if people transfer a lot during life and do not intentionally leave high bequests at the end of life, changes in the marginal estate tax rate would have minimal effect on individual behavior. More importantly, the underlying motives for inter-vivos transfers and bequests could be different. The former responds to uncertain needs in the family such as borrowing constraints binding now and then, while the latter is more likely to arise from pure warm-glow. Thus correctly specifying the model and carefully quantifying these motives are essential for answering policy questions.

I build an overlapping-generation life-cycle model to allow for the retirees to transfer to children each period in retirement, as well as to leave an end-of-life bequest. After properly calibrating the model using the unique survey data collected by the Vanguard Research Initiative (VRI) panel, I plan to quantitatively answer what the optimal estate taxation should be.

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