Publication
The Korean Economic Review
Welfare Aspects of Estate and Gift Taxes in Life Cycle Economies
Troy B. Felver (West Virginia University) and Jane Yoo (Ajou University)Year 2023Vol. 39No. 2
Abstract
We study the welfare implications of lowering estate and gift taxes in an overlapping
generations model, wherein heterogeneous agents face uncertain lifetimes and leave both
accidental bequests and voluntary gifts to their children. According to the findings from the
Survey of Consumer Finances, we consider inter vivos giving made by a working parent
while receiving bequests from his parent(s). We conduct numerical experiments by changing
tax rates and exemption levels in closed and small open economy settings. By adjusting
unified tax rates, we discuss the theoretical implications of optimal gift and estate tax rates
on improving aggregate capital stock and expected lifetime utility. The welfare gains from
higher and broader tax rate changes are measurable and significant in a model with revenue
neutrality using an alternative tax rule of capital gain taxes, thereby leading to the
possibility that these taxes can effectively provide additional resources for the government to
level up disadvantaged populations.