The Trick is to Live: Is the Estate Tax Social Security for the Rich?

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Because estate tax liability usually depends on how long one lives, it implicitly provides annuity income. In the absence of annuity markets, lump-sum estate taxation may be used to achieve the first-best solution for individuals with a sufficiently strong bequest motive. Calculations of the annuity embedded in the U.S. estate tax show that people with $10 million of assets may be effectively receiving more than $100,000 a year financed at actuarially fair rates by their tax payments. According to my calibrations, the insurance effect reduces the marginal cost of funds (MCF) for the estate tax by as much as 30% and the resulting MCF is within the range of estimates for the marginal cost of funds for the income tax.

Published: Journal of Political Economy, 2003, 111(6), 1318-1341.

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