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In vivo transfers are gifts living parents give to their adult children. In other words, in vivo transfers can be likened to bequests, the main distinction being that with an in vivo transfer, the transfer occurs between two living persons. According to the life-cycle permanent income hypothesis (Kotlikoff 2001), an individual saves and borrows in order to smooth consumption in the face of income fluctuations. Like bequests, in vivo transfers affect the utility and budget constraints of individuals who are concerned about the future welfare or happiness of their children. This theory of consumption further predicts that changes in tax structure may influence consumption patterns over time.
Any change in fiscal policy, uncertainty, costs, preferences, and the like provides an incentive for individuals concerned with the future happiness of their children to change their consumption, saving, and wealth-accumulation behavior and provide in vivo transfers. An obvious incentive provided by a tax on transfers of wealth at death is for taxpayers to arrange to transfer wealth before dying by making gifts to their heirs. As such, the gift tax is the government’s response to such efforts to avoid inheritance taxes. In short, according to the life-cycle permanentincome hypothesis, tax policy may have important implications for in vivo transfers and bequests.
Joseph Altonji, Fumio Hayashi, and Laurence Kotlikoff (1997) test whether in vivo transfers are motivated by altruistic concern by individuals for their children. They find that parents increase their transfer by a few cents for each extra dollar of current or permanent income they have, which in itself is consistent with altruism. Interestingly, they also find that parents reduce their transfer for every increase in their children’s income. Using French data, Luc Arrondel and Anne Laferrere (2001) also report evidence that transfer behavior is responsive to changes in the fiscal system. In contrast to Altonji, Hayashi, and Kotlikoff, Arrondel and Laferrere find no support for altruism. In their view, no legal or fiscal system is so strong and so detailed as to determine family behavior, but some individuals seem to use the tax system to optimize their transfers. They find strong behavioral responses to tax incentives. The empirical tests do not validate a single model of intergenerational transfers. They conclude that altruism seems to be involved at the time in the life-cycle when children are young adults, but the gifts are of comparatively small amounts. Altruism is harder to detect from the study of total in vivo gifts.
Ernesto Villanueva (2005) found some evidence that public help may displace in vivo transfers. Tentative estimates suggest that in West Germany, an extra dollar of public help displaces between 8 and 12 cents of parental transfers. Those results are somewhat smaller than corresponding estimates from the United States reported by Robert Schoeni (2000). That is, following a cut in unemployment benefits, individuals who have access to private help are less likely to see their standard of living affected by the change. Comparing in vivo transfers in size and incidence between ethnic groups, using data from the mid- to late-1980s, Mark Wilhelm (2001) found that annually whites had a higher likelihood of receiving a transfer and that it was on average a larger amount for whites than non-whites. The average amount received was $2,824 for whites and $805 for non-whites. The average incidence of receipt was 20 percent for whites and 17.8 percent for non-whites.
Using U.S. data, David Joulfaian and Kathleen McGarry (2004) examine the responsiveness of in vivo transfers to changes in tax laws. They find that many wealthy individuals do not take full advantage of the ability to make in vivo transfers free of estate and gift taxes, as long as the gift is less than approximately $40,000 per year, and those who do make in vivo transfers do so only on a one-off basis. Further, they find that there are sizable shifts in the timing of giving in response to tax changes, but the wealthy do not make sizable in vivo transfers over time.
In summary, there is considerable evidence that taxes and specifically estate and gift taxes appear to influence decisions to make in vivo transfers.
- Altonji, Joseph G., Fumio Hayashi, and Laurence J. Kotlikoff. Parental Altruism and In Vivos Transfers: Theory and Evidence. Journal of Political Economy 105: (6): 1121–1166.
- Arrondel, Luc, and Anne Laferrere. 2001. Taxation and Wealth Transmission in France. Journal of Public Economics 79 (1): 3–33.
- Cox, Donald. 1987. Motives for Private Income Transfers. Journal of Political Economy 95 (3): 508–546.
- Joulfaian, David, and Kathleen McGarry. 2004. Estate and Gift Tax Incentives and Inter Vivos Giving. National Tax Journal 57 (2, pt. 2): 429–444.
- Kotlikoff, Laurence J. 2001. Essays on Saving, Bequests, Altruism, and Life-Cycle Planning. Cambridge, MA: MIT Press.
- Schoeni, Robert. 2000. Does Unemployment Insurance Displace Familial Assistance? Rand Labor and Population Program, Working Paper No. 00-05. http://www.rand.org/pubs/drafts/DRU2289/.
- Villanueva, Ernesto. 2005. Inter Vivos Transfers and Bequests in Three OECD Countries. Economic Policy 20 (43): 505–565.
- Wilhelm, Mark O. 2001. The Role of Intergenerational Transfers in Spreading Asset Ownership. In Assets of the Poor: The Benefits of Spreading Asset Ownership, ed. Thomas M. Shapiro and Edward N. Wolff, 132–164. Ford Foundation Series on Asset Building. New York: Russell Sage Foundation.
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