Tax On Capital & Savings Part B Flashcards
(34 cards)
What tax do the US use for inheritance
Estate tax:
40% on estates above $5.5m
but charitable and spousal giving is fully exempt e.g bill gates could give all wealth tax free to charity (hence why rich have charities….)
Estate tax only affects the richest! But people do not know this.
How many people /1000 wealthy enough to face this tax
1/1000
Welfare effects of inheritances (argument for and against taxing inheritance)
Inheritance contributes to inequality - so seems fair to tax redistribute from those who received inheritances.
however, unfair to tax parents who worked hard to pass down the wealth to their children (esp if altruistic parents i.e work to pass down!)
Behavioural responses of inheritance tax (2 for parents, 1 for the inheritors)
Direct effect is reduced wealth accumulation of altruistic parents!
Reduced labour supply of altruistic parents (less incentive if cannot pass down to kids)
Induces inheritors (kids) to work more through income effects (receive smaller inheritance)
4 models of bequests to show optimal inheritance tax:
accidental bequests
altruistic bequests
manipulative bequest motive
social-family pressure bequests
Accidental bequests
People die with wealth they intended to spend on themselves (do not plan to leave leftover wealth - may die unexpectedly)
Would an inheritance tax have a distortionary effect on behaviour of parent if accicidental bequests?
B) so if accidental bequests, is there a case to tax inheritance?
No it would not distort behaviour of parents, since weren’t planning to save wealth for kids anyway.
B) yes, since there may not be change in behaviour of parent
How many people say the main reason they accumulate wealth is for bequests to their children (altruistic)
B)
Altruisitic bequests: where do these parents get utility from
only 1/3.
B) They get utility from leaving money for children.
Recall Atkinson-Stiglitz does not advocate for capital tax, but just labour income tax.
However, he does support bequest taxation. Why?
Because AS assumes differences in earnings comes down to only worker ability, whereas now we introduce inheritance contributing to inequality as well as ability!
So bequest taxation addresses inheritance inequality
Manipulative bequests
Use potential bequests to extract favours from children - use the promise of inheritance to influence childs behaviour
What does Bernheim-Shleifer-Summers find on manipulative bequests
Number of visits of children to parents is correlated with bequeathable wealth - perhaps more incentivised under the hope for inheritance
Social-family pressure bequests
Parents may not want to leave bequests but feel compelled to by pressure of society
Social family pressure:
With estate tax, how do parents feel?
They feel they do not need to give as much (they are made better-off by estate tax, since it reduces wealth, reducing children’s expectations!)
so case for estate tax stronger (not only raises revenue, but better for parents - less social family pressure bequests)
Empirical evidence on social family pressure bequests
During life - while healthy
Gifts are often less equally distributed among children, since parent is alive, can explain decisions etc and can manage fallouts
However at death wills are more equally split to avoid conflict after theyre gone.
Thus shows how parents can change behaviour based on social pressure
Why do official stats underestimate net foreign asset positions of rich countries
Tax evasion - hold in off-share tax havens e.g US individual opening Cayman Islands account and buy US stock but this is not reported in US, only Cayman Islands
How much of global wealth is in tax havens estimate:
8% - a lot!
3/4 of it, (6%) is unrecorded
How to curb off-shore tax evasion
Exchange of information across countries (eliminate bank secrecy) - but requires all countries cooperation!
What has been done, and has it been effective?
G20 countries have forced some tax havens to sign treaties on bank info sharing
Not that effective - Tax evaders responded by shifting deposits to havens not in the treaty (hence why ALL COUNTRIES COOPERATION NEEDED)
FATCA ‘13 . US’s attempt to address tax evasion
Impose information exchange for all entities dealing with US
E.g if foreign bank doesn’t provide list of its all US account holders, any transaction between them and US has 30% tax
Long term solution for off-shore tax evasion requires: (2)
Systematic registration of assets to ultimate owners
Systematic information exchange
How could this be enforce/how to increase compliance
With tariff threats on tax heavens e.g if they do not provide list of US holders, US can impose a tariff imposed on importing US goods
What is the change in debt-to-GDP ratio (dt - dt-1)
Pg 18
𝑑𝑡 − 𝑑𝑡-₁ = [𝑟𝑡− 𝑔𝑡/1+𝑔𝑡]𝑑𝑡-₁ − 𝑝𝑏𝑡
Change in debt-to-GDP ratio =
rt : real interest rate on debt
gt: GDP growth rate
Pbt: primary balance
How to control debt (3)
Strong economic growth (gt>rt) to reduce debt-to-gdp ratio
Inflation
Fiscal consolidation (decrease deficit with wealth tax)
Strong economic growth is gt>rt
Why may periods of g>r not be long
As countries with larger debt likely have higher interest rates, so increased r and reduced g!
