Do Estate Taxes Reduce Saving?* Revised: November, 2000

opinions expressed are our own and should not be ascribed to the officers, staff or trustees of the Brookings Institution or the Board of Governors of the Federal Reserve. This paper examines the impact of estate taxes on saving in a series of models that posit different motivations for transfers between parents and children. We show that the effects of the tax on saving depend on why donors give bequests. In addition, under each motive examined--bequests as accidents, as exchange, and as altruism--estate taxes can raise net saving by the donor and recipient. Recycling the tax revenue to the donor generally reduces the impact of estate taxes on saving, but still leaves open the possibility that the net saving effect is positive. Because there is no consensus on the correct model of intergenerational transfers, it is impossible to pin down the effect of estate taxation on saving. Nevertheless, our analysis indicates that the widely-held presumption that estate taxes reduce saving is not a general result. 1The estate tax is one of the most controversial components of tax policy, but its economic effects are not yet well understood. For example, there appears to be a general presumption that higher estate taxes will reduce saving and aggregate capital accumulation (Kotlikoff and Summer