Bequests Research Paper

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A bequest is the act of leaving personal wealth to a person or heir by a will. The distribution of bequests not only has potentially important consequences for the distribution of wealth but also the distribution of income. Bequests often take the form of income yielding assets, such as farms, businesses, rental property, financial assets, and more. The income from such assets is an important component of total household income, and the proportion of total household income from nonlabor sources increases as total income increases. In other words, high income households receive a higher proportion of their total income from nonlabor sources than low income households. Thus, inequality in the distribution of bequests not only contributes to wealth inequality but income inequality as well.

The impact of bequests on the observed wealth inequality depends on the importance of bequests in total household wealth. If bequests are a large share of household wealth, then bequests may be an important factor in explaining the observed inequality in the distribution of wealth. And vice versa, if bequests are only a small share of household wealth, then the unequal distribution of bequests may play only a minor role in explaining the observed wealth inequality. Accordingly, considerable effort has been devoted to gauging the importance of bequests in household wealth. Economists Keiko Shimono and Hideaki Otsuki provide a review of the empirical evidence for Japan, the United Kingdom, and the United States in the early-twenty-first century. They report that the empirical evidence is mixed, with a wide range of estimates for each country. Generally speaking, some researchers find that bequests make up a large proportion of household wealth, with estimates as high as 80 percent; whereas others estimate that bequests are only a minor share, with estimates as low as 20 percent. The disparity in estimates for a given country derives mainly from the varying treatment of the interest income from bequests.

Explaining Bequests

In addition to gauging the potential effects of bequests on the distribution of household wealth, there are a variety of theories in the economics literature attempting to explain what motivates individuals to leave bequests. In other words, why don’t people simply consume all of their wealth during their lifetime? A prominent explanation for bequest behavior is that parents may be altruistically motivated to save and thereby accumulate wealth in order to leave a bequest to their children and thus increase their children’s future happiness. This is often referred to as the bequest motive for saving. Formally, the parents’ utility or happiness may be a function of their children’s utility, and, in turn, each child’s utility is assumed to be a function of the bequest received from their parents.

Such theories can have interesting twists. The Samaritan’s dilemma, as explained by Ritsuko Futagami and his colleagues, describes a situation in which a child may save an inadequate amount of money in order to maximize the bequest from their parents, and the rotten kid theorem suggests that parents may give larger bequests to their delinquent or rotten children in order to elicit good behavior from them in the future. In any event, such theories suggest that the so-called bequest motive of saving may be an important explanation of household saving. As such, there is an extensive literature attempting to model the bequest motive as well as measure its importance in explaining household savings and the accumulation of wealth.

Mohamed Jellal and Francois-Charles Wolff find that parents who themselves are given bequests are more likely to give bequests to their children. As such any policy that affects current bequests to children may affect the bequest behavior of future generations. In this view, any program that currently affects the level of public taxes and subsidies will have a long-term impact on the provision of bequests due to habits passed on to them by the example set by their parents. In other words, parents who are net-beneficiaries of government programs will redistribute more resources to their children because they have higher incomes and the social safety-net provided by government programs reduces the need for precautionary bequests. In addition, by making a bequest, parents shape the preferences of their children, who in turn leave larger bequests to their own children.

Bequests And Public Policy

Modeling the bequest motive is not merely of academic interest; the nature of the bequest motive also may have important implications for public policy. For example, according to the bequest motive of savings, a change in government tax or transfer programs may influence the future welfare of future generations. If parents care about the future happiness of their progeny, then households may adjust their savings behavior to leave a bequest which partially or fully offsets the anticipated change in government policy on the future welfare of their children, and, perhaps, their children’s children. For example, if parents and grandparents perceive that a government financed retirement program has made them better off at the expense of higher current or future taxes on their children and grandchildren, they may leave larger bequests in order to offset the deleterious effects of the program on their children and grandchildren’s welfare.

The bequest motive of savings also has important implications for the economic effects of inheritances taxes and government deficits. If parents save in order to leave a bequest, then changes in inheritances taxes may change their savings behavior because it changes the cost or netof-tax price to the individual of a bequest of a given amount. More specifically, if the inheritance tax rate is 50 percent, then a $1.00 transfer net-of-taxes requires a $2.00 transfer. David Joulfaian traces the effects of income and estate and gift taxes on the net-of-tax price of wealth transfers. His estimates suggest that taxes may have a significant effect on the timing of transfers, which suggests that the wealthy are influenced by taxes in setting their lifetime transfers, adding another dimension to the literature on bequests.

Regarding the implications of bequests for government deficits, many economists maintain that deficit financing of government expenditures may result in higher interest rates and thereby crowd out private investment. If the return to private investment is higher than the return to public investment, then the crowding-out effect of deficits could be harmful to economic growth. According to Robert Barro a deficit-financed cut in current taxes leads to higher future taxes. Parents, however, may adjust their savings in order to leave larger bequests to their children in order to offset the effect of future tax liabilities on their children’s future income (wealth). In this case, there is no crowding-out effect from deficit financing because the future tax liabilities are offset by an increase in current savings; there is no change in the interest rate, and private investment is unaffected.

Bibliography:

  1. Barro, Robert J. 1989. The Ricardian Approach to Budget Deficits. Journal of Economics Perspectives 3 (2): 37–54.
  2. Futagami, Ritsuko, Kimiyoshi Kamada, and Takashi Sato. 2004. Government Transfers and the Samaritan’s Dilemma in the Family. Public Choice 118 (1–2): 77–86.
  3. Jellal, Mohamed, and Francois-Charles Wolff. 2002. Altruistic Bequests with Inherited Tastes. International Journal of Business and Economics 1 (2): 95–113.
  4. Joulfaian, David. 2005. Choosing Between Gifts and Bequests: How Taxes Affect the Timing of Wealth Transfers. Journal of Public Economics 89 (11–12): 2069–2091.
  5. Shimono, Keiko, and Hideaki Otsuki. 2006. The Distribution of Bequests in Japan. Journal of the Japanese and International Economies 20 (1): 77–86.

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