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.
This work was partially supported by the Kendrick Prize 2012 awarded by the Department of Economics of the George Washington University and research fund of Ajou University. This work is based on Jane Yoo’s Ph.D. dissertation and benefited from useful discussions with and comments from Pamela Labadie, Roberto Samaniego, Chao Wei, Marco Cagetti, Lei Guo, Dirk Krueger, Ayşe İmrohoroğlu, and the seminar and conference participants at the George Washington University, Southern Economic Association (SEA 2012), Midwest Macroeconomics Conference, and Fall 2012 Quantitative Society for Pensions and Saving (QSPS). We thank two anonymous referees for their comments.* This work was partially supported by the Kendrick Prize 2012 awarded by the Department of Economics of the George Washington University and research fund of Ajou University. This work is based on Jane Yoo’s Ph.D. dissertation and benefited from useful discussions with and comments from Pamela Labadie, Roberto Samaniego, Chao Wei, Marco Cagetti, Lei Guo, Dirk Krueger, Ayşe İmrohoroğlu, and the seminar and conference participants at the George Washington University, Southern Economic Association (SEA 2012), Midwest Macroeconomics Conference, and Fall 2012 Quantitative Society for Pensions and Saving (QSPS). We thank two anonymous referees for their comments. ** First Author, Visiting Assistant Professor, Department of Management, John Chambers College of Business and Economics, West Virginia University, E-mail: troy.felver@mail.wvu.edu *** Corresponding Author, Associate Professor, Department of Financial Engineering, Ajou University, E-mail: janeyoo@ajou.ac.kr
