This paper describes the current estate and gift tax rules that apply to intergenerational transfers in the US. It summarizes the incentives for inter vivos giving, gifts from a donor to a recipient while the donor is alive, as a strategy for reducing estate tax liability. It shows that the current level of intergenerational transfers is much lower than the level that would be implied by simple models of dynastic utility maximization. Moreover, even among elderly households with net worth in excess of $2.5 million, roughly four times the net worth at which US households became liable for estate tax in 1995, only about 45 % take advantage of the opportunity for tax-free inter vivos giving. Cross-sectional regressions using the 1995 Survey of Consumer Finances suggest that transfers rise with household net worth, possibly reflecting the impact of progressive estate taxes. Households with a preponderance of their net worth in illiquid forms, such as a private business, are less likely to make transfers than their equally wealthy counterparts with more liquid wealth. Those with substantial unrealized capital gains, for whom the benefits of ‘basis step-up at death’ under the income tax are greatest, are less likely to make large inter vivos transfers than

Abstract The tax treatment of lifetime transfers was altered on a number of occasions since the enactment of gift tax six decades ago. Trends in gifts by the wealthy show a dramatic response to these changes. In this paper, I examine this trend and gauge its response to taxes, transitory and permanent, over a period of 65 years. Results suggest that gifts are highly elastic with respect to taxes, particularly in the short run. Tax minimization seems to be an important consideration in the timing of intergenerational transfers. Published by Elsevier B.V.

The paper greatly benefitted from the comments of seminar participants at OTA, George Washington, Rutgers, and Georgia State universities, and in particular of two anonymous referees. It was completed during my visit at NBER, whose support is gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the Department

on August 23-25, 2001. I would like to thank the participants in the symposium as well as Robert Goodin, Alain Parguez, and Mario Seccareccia for their comments and suggestions. The usual Various models have been used to explain differences in non-human wealth holdings in a capitalist society. Some refer to the importance of inter-generational transfers such as bequests of assets while others emphasize the role of inter-vivos transfers such as knowledge and information, in addition to those intended to facilitate capital accumulation (e.g., assistance with down payment for home purchases). In this study, I follow a different approach and focus on the links between private wealth and public policy. First, it will be shown that private sector wealth corresponds to the accumulated public debt and that public budget deficits are a source of wealth for the private sector. The second part of the argument demonstrates that particular economic policies have different effects on the wealth holdings of different groups of society. For instance, a low interest-rate policy will clearly benefit those who must borrow money (viz. businesses and potential buyers of homes and other assets) but at the expense of the rentiers and vice-versa. Similarly, other policies (e.g., spending on public infrastructure) will have disproportionate effects on individuals depending on their location, social status, and other characteristics that increase or lower their opportunities to take advantage of the derived benefits from such spending. Public Debt and Private Wealth

Various models have been used to explain differences in non-human wealth holdings in a capitalist society. Some refer to the importance of inter-generational transfers such as bequests of assets while others emphasize the role of inter-vivos transfers such as knowledge and information, in addition to those intended to facilitate capital accumulation (e.g., assistance with down payment for home purchases). In this study, I follow a different approach and focus on the links between private wealth and public policy. First, it will be shown that private sector wealth corresponds to the accumulated public debt and that public budget deficits are a source of wealth for the private sector. The second part of the argument demonstrates that particular economic policies have different effects on the wealth holdings of different groups of society. For instance, a low interest-rate policy will clearly benefit those who must borrow money (viz. businesses and potential buyers of homes and other assets) but at the expense of the rentiers and vice-versa. Similarly, other policies (e.g., spending on public infrastructure) will have disproportionate effects on individuals depending on their location, social status, and other characteristics that increase or lower their opportunities to take advantage of the derived benefits from such spending. * I would like to thank Robert Goodin, Alain Parguez, and Mario Seccareccia for their comments and suggestions. The usual disclaimer applies. Public Debt and Private Wealth by

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The 1998 Survey of Consumer Finances provides information on household wealth ownership that can be used to estimate the effect of changing the Unified Estate and Gift Tax Credit on estate tax revenues. The survey also includes data on the prices at which assets were purchased, along with information on their market values. This makes it possible to compare the revenue yield and the distributional consequences of taxing estates with those of taxing unrealized capital gains on assets held by individuals who die. This paper uses data from the Survey of Consumer Finances to estimate the revenue effects of changes in both estate tax provisions and capital gains tax rules. It finds that among those with small estates ($1 million or less), taxing capital gains at death would collect more revenue than the current estate tax from roughly half of the decedents. For those with larger estates, replacing the estate tax with a tax on unrealized gains at death would result in a substantial reduction in total tax payments. The revenue estimates and distributional analyses assume no change in the current capital gains realization behavior of taxpayers, even if the tax law changes. This is an important limitation, and the paper notes several directions for further research that might help to relax this assumption.