VoxEU Column Taxation

Estate taxation and intergenerational transfers

What are the effects of inheritance tax on bequests and tax avoidance? This column examines data from Italy suggesting that the abolition of transfer taxes increased real estate inheritance by around 2 percentage points. Given that the ratio of real estate to total wealth exceeds 85% for the over 60s in Italy, it is likely that at least part of this increase is a genuine effect.

Taxing inheritances is common and controversial but not particularly lucrative for the taxman. The US and the vast majority of European countries tax intergenerational transfers, but such tax receipts barely exceed 1% of total government revenues in OECD countries. Nevertheless, estate taxes are the subject of intense quarrels because of their potential effects on capital accumulation and intergenerational wealth mobility.

To date, the policy debate lacks reliable estimates of the effect of transfer taxes on the propensity to bequeath, and therefore fiscal revenues, wealth transmission, and intergenerational mobility. One crucial reason is the lack of data on donors, which is key in this context, because the decision to transfer and how much to transfer is affected by both donors’ as well as recipients’ characteristics.

The existing evidence

Three recent empirical studies have attempted to estimate the tax elasticity of bequests (Holtz-Eakin and Marples 2001, Kopczuk and Slemrod 2001, and Joulfaian 2006). They all focus on the US and analyse the relationship between aggregate measures of the estate tax and measures of wealth. These studies find that estate taxes have a dampening effect on wealth and reach fairly similar conclusions on a negative but small elasticity in the range of -0.2 and -0.1. Additionally, when taxes increase individuals’ attempt to avoid taxes also increases, so that any estimate of a change in estate taxes on the size of estates reflects the impact of taxes on wealth accumulation but also that on tax avoidance.

The Italian 2000 estate tax reform

In recent research we estimate the effect of transfer taxes on bequests by exploiting the variability in tax rates induced by a sequence of reforms which reduced and ultimately abolished estate, inheritance, and gift taxes in Italy (Jappelli et al. 2010).

Before the reform, the Italian regime consisted of two taxes. A first tax was levied on the total estate of the donor, with an exemption threshold of approximately €125,000. A second tax was levied on the shares received by the recipients. Both taxes were organised in several brackets with a highly progressive tax rate (from 3% to 27%). Between 1999 and 2000 estate taxation was eliminated in three steps. The first reform was implemented in 1999, raising the exemption level that applied to the donors’ total estate from €125,000 to €175,000. In 2000 a second reform ruled that the exemption applied to the share received by each recipient, and not to the total estate, effectively further raising the exemption.1 In the final step, the estate tax was abolished at the end of 2001.

The cancellation of taxes did not affect all households equally, because the reform had no impact on relatively poor donors who were already exempt from estate taxation prior to the reforms. Therefore the differential impact of the tax reforms across the wealth distribution allows us to identify the impact of estate taxation on bequests and to estimate the tax elasticity of bequests in a standard difference-in-difference framework.

Evidence from the Italian reform

We use data from the Bank of Italy Survey of Household Income and Wealth, which includes information on the number and size (in square meters) of real estates received as inheritance or as gift and, for respondents and spouses, data on parents’ education and occupation. We can thus merge information on donors and recipients to study the impact of estate taxation on intergenerational transfers.

Since potential donors’ resources are not observed, we split the sample on the basis of donors’ characteristics that are correlated with their lifetime wealth. For instance, we define as “high-occupation donors” families where at least one potential donor was either entrepreneur, manager, professional or self-employed during his or her working life.

Figure 1. Fraction of households receiving real estate as a bequest or as a gift, by parental occupation

The figure reports the fractions of high- and low-occupation donors leaving a bequest or making a donation. We define as high-occupation donor a group of potential donors in which at least one of the parents of the household head (or of his/her partner, or both) were in a “high” occupation. Before 2000, the fraction of high-occupation donors transferring wealth was, on average, 32% and 26% in the low-occupation group. After the reform the fraction increased to 40% in the high-occupation group, against 31% in the low-occupation group. The difference between high- and low-occupation donors increased by 2.4 percentage points after the reform.

Our descriptive evidence and the regression results suggest that the abolition of transfer taxes increased real estate intergenerational transfers. The evidence indicates that the effect took place mostly at the extensive margin, raising the fraction of donors by about 2 percentage points. It is important to point out that with our data we cannot establish if the increase in the fraction of donors reflects a genuine increase in the propensity to transfer (a wealth effect), or a change in the composition of transfers (a tax avoidance effect), or a combination of the two. It might well be that after the reform donors are more willing to transfer wealth in the form of real estate, rather than in other forms, such as financial wealth. However, since in Italy the ratio of real estate assets to total wealth exceeds 85% for the over 60s, it is likely that at least part of the increase in the propensity to bequeath real estates is a genuine effect.


1 Above the exemption threshold, the tax became a flat rate of 4 percent for the spouse and direct relatives, 6 percent for relatives up to fourth degree and members of the stepfamily up to third degree, and 8 percent for other recipients.


Holtz-Eakin, Douglas and Donald Marples (2001), “Distortion Costs of Taxing Wealth Accumulation: Income Versus Estate Taxes”, NBER Working Paper 8261.

Jappelli, Tullio, Mario Padula and Giovanni Pica (2010), “Estate Taxation and Inter-generational Transfers,” CEPR DP 7701, January.

Joulfaian, David (2006), “The Behavioural Response of Wealth Accumulation to Estate Taxation: Time Series Evidence”, National Tax Journal, 59:253-68.

Kopczuk, Wojciech and Joel Slemrod (2001), “The Impact of the Estate Tax on the Wealth Accumulation and Avoidance Behaviour of Donors”, in William G Gale, James R Hines Jr, and Joel Slemrod (eds.), Rethinking Estate and Gift Taxation. Washington, Brookings Institution Press.

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