May 8, 2023

A recent study published in the American Economic Association’s journal, found that taxing wealthy families in order to break up dynasties may not be as effective as previously thought. The study, which analyzed estate tax data from 18 states over several decades, suggests that these types of taxes may actually encourage families to accumulate even more wealth.

According to the study, when states increased estate taxes on wealthy families, those families were more likely to set up trusts and other legal mechanisms to pass wealth down to future generations, rather than spend or donate it. Additionally, the study found that when estate taxes were increased, the rate at which wealthy families donated to charity decreased.

This research is particularly relevant to current debates in New York, where lawmakers are considering implementing a “billionaire’s tax” that would increase taxes on the state’s wealthiest residents. While the goal of the proposed tax is to generate revenue for the state, it’s unclear whether such a tax would have the desired effect of reducing wealth inequality.

It’s important to note that while the study provides valuable insights into the potential unintended consequences of taxing wealthy families, it doesn’t necessarily mean that such taxes are always a bad idea. Instead, policymakers should carefully consider the potential effects of any tax policy on both revenue generation and wealth inequality and craft policies that balance these competing interests.

As we continue to debate the best ways to address wealth inequality, it’s clear that there are no easy answers. However, by considering the latest research and engaging in thoughtful debate, we can work toward policies that promote fairness and equity for all.

Source: Alm, J., Bernasconi, M., & Loeffler, M. (2021). Does the Estate Tax Raise Revenue and Reduce Wealth Inequality? Evidence from State Administrative Data. American Economic Journal: Economic Policy, 13(1), 1-30. doi:10.1257/pol.20200685