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Does past experience affect future behavior? Evidence from estate tax avoidance behavior

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Abstract

Unlike most other taxes that are levied on most individuals or corporations, the estate tax is levied on a small number of very large estates. This divides taxpayers sharply into two groups—those who have experience of having paid it before and those who don’t. Given the nature and the rate of the estate tax, the experience of having paid it is probably neither negligible nor forgettable. In this paper, using data from the Survey of Consumer Finances and a regression discontinuity design, I find evidence that the experience of paying the estate tax in the past increases the probability that the individual is currently engaged in estate tax avoidance behavior for their children. I also find that the experience has an impact on the probability (extensive margin), but not on the amount (intensive margin).

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Notes

  1. For a survey of literature on tax avoidance and its consequences, see Slemrod and Yitzhaki (2002) and Saez et al. (2012).

  2. See Gale et al. (2001) for various research topics on estate taxation.

  3. There is another advantage for gifts. As I mention in Sect. 2, even though the statutory tax rate is the same, gifts face a lower effective tax rate than estates.

  4. Gale et al. (2001) and Kopczuk (2013) survey related literature.

  5. See, for example, Altonji et al. (1997), Bernheim et al. (1985), Cox (1987; 1990) and Cox and Rank (1992) among others. Laferrre and Wolff (2006) and Arrondel and Masson (2006) survey theoretical and empirical literature, respectively.

  6. See McCaffery and Slemrod (2006) for a collection of interesting studies in the field. And Madrian (2014) and Chetty (2015) survey recent papers and issues in this field.

  7. It was $10,000 in 1998 and indexed for inflation since then.

  8. Some of the material in this subsection is drawn from Choi (2014).

  9. In the public-use data, the year is rounded to the nearest 5.

  10. Although the SCF 2010 is newly available, the SCF 2007 is the latest one when I started this project.

  11. Available at http://www.federalreserve.gov/econresdata/scf/files/bulletin.macro.txt

  12. I get qualitatively similar results when I use the entire 4418 individuals.

  13. See Menchik (1988), Wilhelm (1996), Dunn and Phillips (1997), Laferrre and Arrondel (1998), and McGarry (2001).

  14. I exclude wealth variables such as liquid assets and net worth from this comparison, because wealth accumulation behavior can be affected by the past estate tax experience.

  15. A referee suggests that due to the normal delays in arranging for the distribution of estates, the cutoff for estate tax could be a little lower than $675,000, say, for example, $650,000 in 2000. In fact, if I use a cutoff of $650,000 in the graphical analysis, the cutoff still matters for inter vivos transfer behavior. In the following regression analysis, where I use the entire dataset, not just those who received an inheritance in 2000, I assume that the individual had paid the estate tax before if the ratio between the estimated size of the parent’s estate at death and the exemption level for the estate tax exceeds 1. Using 0.9, instead of 1, as the cutoff still gives the same results, while the results are no longer significant if I use 0.8 as the cutoff. This suggests that the referee’s comment is valid, i.e., there are some delays in the distribution of estate and, thus, the correct cutoff might be a little lower than the tax threshold and the difference could be about 10 %.

  16. Other control variables include total amount of inheritances (in 2006 dollars), income, liquid assets, age, retirement status, marital status, education, and the number of children.

  17. If I use a fake threshold of 0.8 instead of 1 as a placebo test, the variable loses statistical significance. If I use 0.9, the result is still significant. This could reflect the fact that due to normal delays in arranging for the distribution of estate, the actual cutoff could be a little lower. (see footnote 15 for details.) For values above 1, I need a fake threshold higher than 1.5 for the variable to lose significance. This is probably because of a small sample size just above the threshold.

  18. I thank an anonymous referee for this point.

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Acknowledgments

I thank Alan Blinder, Henry Farber, Junghun Kim, John Londregan, Harvey Rosen, Heonjae Song and seminar participants at Princeton University, Korea Institute of Public Finance, and University of Seoul for helpful comments. I also thank Robert Chirinko (the editor) and two anonymous referees for their valuable suggestions.

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  1. Korea Institute of Public Finance, 1924 Hannuri-daero, Sejong, Korea

    Sungmun Choi

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Choi, S. Does past experience affect future behavior? Evidence from estate tax avoidance behavior. Int Tax Public Finance 24, 416–431 (2017). https://doi.org/10.1007/s10797-016-9425-0

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