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A NOTE ON THE ANNUITY ROLE OF ESTATE TAX

Published online by Cambridge University Press:  14 October 2020

Monisankar Bishnu  and
Cagri Kumru
Monisankar Bishnu
Affiliation:
Indian Statistical Institute
Cagri Kumru*
Affiliation:
The Australian National University
*
Address correspondence to: Cagri Kumru, The Research School of Economics, The Australian National University, Canberra, Australia. e-mail: cagri.kumru@anu.edu.au.
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Abstract

The previous conclusion that a uniform lump-sum estate tax could implicitly provide annuity income was reached by ignoring the inheritance that agents receive. However, when the agents leave a bequest, they should also receive an inheritance from their parents. Thus, we make the inheritance received—bequests left cycle complete and fully endogenous. Interestingly, the differential timing and sizes of inheritance then generate unequal wealth effects even with actuarially fair annuity markets. To restore the first best, the government has to adopt an estate tax regime that is no longer uniform. Thus, once bequest is fully endogenized, a uniform estate tax no longer bears the annuity role. Further, the differential timing in receiving inheritance creates an unequal wealth distribution, which is also nonstationary. The paper manifests the importance of accounting for and tracing the inheritance received by agents for any crucial policy recommendation.

Keywords

BequestsEstate TaxAnnuity
Type
Notes
Information
Macroeconomic Dynamics , Volume 26 , Issue 3 , April 2022 , pp. 800 - 812
Copyright
© Cambridge University Press 2020

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Footnotes

The authors are grateful to William Barnett (Editor), an Associate Editor and two Referees for their excellent comments and suggestions. We thank Dan Cao, Jim Feigenbaum, Marek Kapička, and Ricardo Reis for their valuable comments. Thanks are also due to the participants of Midwest Macroeconomics Meeting (Fall 2017), EEA-ESEM Lisbon (2017), and Delhi School of Economics Public Economics Workshop (2018) for their feedback. We owe special thanks to Nick Lei Guo for the initial discussion that led to the very first draft.

References

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