A note on the annuity role of estate tax

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. Show more