THE BEHAVIORAL RESPONSE OF 

WEALTH ACCUMULATION TO ESTATE TAXATION: 

TIME SERIES EVIDENCE 

by 

David Joulfaian 

US Department of the Treasury 

OTA Paper 96 November 2005 
THE BEHAVIORAL RESPONSE OF 
 

WEALTH ACCUMULATION TO ESTATE TAXATION: 
 

TIME SERIES EVIDENCE
 

by 
 

David Joulfaian 
 

US Department of the Treasury 
 

OTA Paper 96 November 2005
 

OTA Papers is an occasional series of reports on the research, models, and datasets 

developed to inform and improve Treasury’s tax policy analysis. The papers are works in 

progress and subject to revision. Views and opinions expressed are those of the authors 

and do not necessarily represent official Treasury positions or policy. OTA Papers are 

distributed in order to document OTA analytic methods and data and invite discussion 

and suggestions for revision and improvement. Comments are welcome and should be 

directed to the authors. 

Office of Tax Analysis 
 

US Department of the Treasury 
 

1500 Pennsylvania Avenue, NW
 

Washington, DC 20220 
 

_________________ 

The paper benefited from comments by Gerald Auten and Robert Carroll for helpful 

comments. The valuable research assistance of Margaret Rolley is gratefully 

acknowledged. Comments are welcome to david.joulfaian@do.treas.gov. 
The Behavioral Response of Wealth Accumulation to Estate Taxation: 

Time Series Evidence 

Abstract 

This paper explores the behavioral response of taxable bequests to estate taxation. To 

gauge its effects, the estate tax is converted to an equivalent income tax. This highlights 

the importance of expected rates of return, and also makes it possible to compare 

effective tax rates on saving over time. Using data on federal revenues from the estate tax 

over the past 50 years, and employing the equivalent income tax rate measure, the 

findings suggest that estate taxes have a dampening effect on the reported size of taxable 

estates. Estate taxation seems to depress taxable bequests by some 14 percent. 

Keywords: Saving, Bequests, Taxes 

JEL: D19, H31 

1
 
I. Introduction 

Capital taxes create disincentives for saving. Income taxes, such as those that apply to 

capital gains, interest, and dividends, create disincentives to save by reducing rates of 

return. Similarly, estate and inheritance taxes may create similar disincentives for the 

bequest motivated saver (Fiekowsky, 1966; Poterba, 1997). With its repeal on the agenda, 

as provided for in The Economic Growth and Tax Relief Reconciliation Act of 2001 

(EGTRRA), understanding the effects of the estate tax on wealth accumulation is 

important. 

While the disincentives created by capital taxes are clear, a priori, the theoretical effect of 

these taxes on donors is ambiguous and depends on the offsetting substitution and income 

effects. More specifically, it depends on the preferences of the potential saver. In the 

presence of altruistic bequests, for instance, Caballe (1995) and Laitner (2000) simulate 

the estate tax to have a depressing effect on the capital stock. Similarly, Gale and Perozek 

(2001) argue that the effects on saving depend critically on the underlying transfer 

motives. Ultimately, however, the effect of estate taxation is an empirical question. One 

is tempted to rely on the findings in the literature on the effects of income taxes.1

 But 

because bequest taxes apply to the stock of terminal wealth, they may not be directly 

comparable to the income tax that applies to the return to saving or income flows during 

the life cycle. 

The scarcity of data on the size and distribution of wealth spanning different tax regimes, 

particularly for the wealthiest segment of society, has limited the thorough study of the 

effects of estate taxation. Holtz-Eakin and Marples (2001), for instance, employ the 

Health and Retirement Survey panel data (HRS), where the wealthy are under 

represented, to explore the effect of estate taxes on wealth accumulation. They find estate 

and inheritance taxes to have a depressing effect on wealth accumulation. 

1 For the taxable income response see Feldstein (1995), Auten and Carroll (1999), Carroll (1998), Gruber 

and Saez (2002), and Kopczuk (forthcoming). For the effects on savings, see Bernheim (1999). 

2 
Others resort to administrative data. In the most recent study on the effects of the estate 

tax on wealth accumulation in the US, Kopczuk and Slemrod (2001), hereafter KS, 

employ estate tax data for the pre-war period, and augment them with limited data for the 

post war years.2 

In an earlier study, Chapman, Hariharan, and Southwick (1996), hereafter CHS, explore 

how estate taxes affect post war federal government estate and gift tax revenues. In 

modeling the effects of estate taxes on wealth accumulation, CHS make creative use of 

annual time series data on federal estate and gift tax revenues. Lacking individual level 

data, they regress these annual collections on an imputed contemporaneous measure of 

the estate tax rate. They report tax rates to have a negative effect on this source of 

revenues to the government.3

 The major limitation of this paper is that the dependent 

variable is the combined sum of estate and gift taxes, two variables that do not always 

move in tandem and are governed by different tax regimes. Indeed the spike that CHS 

report in fiscal year 1977 has little to do with estate taxes; it is explained by the 

acceleration of gifts in 1976 with gift taxes paid in 1977 (Joulfaian, 2004a).4 

KS pursue two strategies in examining the effects of the estate tax on wealth. First, they 

expand on CHS and employ time series analysis using aggregate wealth reported on 

estate tax returns for the years 1916 through 1945, and select post war years. Using three 

measures of the tax rate, the maximum, and those imputed for 40 and 100 times per 

capita wealth, KS report a negative correlation between the share of top wealth-holders 

and the estate tax rates. This contemporaneous relationship holds controlling for a 

number of other influences. A similar sentiment is expressed in Kopczuk and Saez (2004) 

2 Generally reliable cross sectional estate tax data are available for deaths in 1982 and most of later years. 

Reliable data is also generally available for the years 1962, 1969, 1972, and 1976. For prior years, data is 

available for the period 1917 through 1945. 

3 While the authors report findings on the contemporaneous effects of taxes, their estimates actually reflect 

a forward looking process as the lead tax rate is employed. Tax collections usually lag the liability year. 

Much of the collections in fiscal year 1990, for instance, reflect wealth and tax liability in calendar year 

1989. Thus their specification generally tests, for example, whether the tax rate in 1990 affected wealth 

reported in 1989. 

4 The maximum gift tax rate increased from 57.75 in 1976 to 70 percent in 1977. 

3 
as they contrast the share of household wealth held by the wealthiest estates with 

contemporaneous estate tax rates. 

In the second strategy, KS resort to pooled cross-sectional analyses that make use of 

individual estate tax returns. Unlike their time series analysis, the effects of the 

contemporaneous estate tax rate on the size of reported wealth is weak. However, they 

find much stronger effects when the tax rate is measured using laws that prevailed at age 

45 or ten years before death. The estimates from their preferred specification imply that a 

tax rate of 50 percent reduces reported wealth by about 10.5 percent. 

The cutting edge work of KS in exploring pooled data is quite formidable, particularly 

when compared to their time series analysis as well as that of CHS. Indeed, it is not clear 

how to interpret the findings from the time series analysis on the effects of 

contemporaneous tax rates or the econometric problems of time series estimation in 

general (Auerbach, 2001). How does the tax regime in effect at death explain wealth 

accumulated during life? After all, if the focus is on wealth accumulation, the behavioral 

response and estate planning must have preceded the date of death. Thus, KS’s analysis 

of the pooled data and the effects of lagged tax regimes should be viewed as a significant 

contribution to the literature. 

Comparisons of trends in wealth accumulation over time is quite challenging, in 

particular as gift taxes did not apply prior to mid 1932.5

 The easiest way to avoid estate 

and inheritance taxes is through tax-free lifetime gifts, unless this is checked by the 

imposition of gift taxes. It is noteworthy that during the congressional deliberations in 

1932 to increase the maximum estate tax rate from 20 to 45 percent, and the introduction 

of a gift tax regime, one individual is reported to have made about $100 million in gifts; 

another to have made gifts of about $50 million (Roosevelt, 1938: 312). Considering that 

the entire yield of the estate tax in 1932 was $400 million, the tax-free inter-vivos 

transfers of $150 million by these two individuals alone, not to mention likely gifts by 

5 The federal government introduced a gift tax in 1924 which was repealed in 1926. 

4 
scores of others, demonstrate the likely sizeable leakages from the estate tax in the early 

years of its enactment. These leakages make intertemporal comparisons a challenging 

undertaking, and may produce biased behavioral estimates when periods with and 

without gift tax regimes are included in the same sample. 

In addition to the gift tax regime, and as noted in Auerbach (2001), relying on pre-war 

data to aid in gauging the effects of the estate tax can be problematic. Also, and as argued 

in Clotfelter (1985, pp. 240), given the frequent pre-war changes in tax laws, it is not 

clear which tax regime is driving behavior. Changes in the definition of residency as well 

as in the tax base only add to this challenge.6 

In this paper I address the effects of estate taxation by examining data on federal 

government revenues from the estate tax for the fiscal years 1949 through 2001, which 

correspond to terminal wealth in the years 1948 through 2000. I also develop measures of 

estate tax equivalent income tax rates to gauge the effects of taxation over time. The 

equivalent income tax rate is the rate that applies to the annual return on an asset that 

leaves the size of an heir’s inheritance unaffected. For a given estate tax rate, the 

equivalent income tax rate is low during periods of high rates of return expectations, and 

vice versa. The reported evidence is suggestive of a stronger estate tax effect when using 

the equivalent income tax measure, and much weaker when the estate tax rate itself is 

used. 

This paper is organized as follows. Section II provides an overview of trends in estate tax 

collections by the federal government, and the evolving tax regimes. Section III discusses 

how estate taxes can be analyzed as an equivalent income tax. It also describes the data 

sources and explains the construction of variables. Section IV presents empirical 

evidence on the effects of the estate tax. The findings are sensitive to specification and 

6 The introduction of the US Treasury Liberty Bonds and, subsequently, Flower Bonds which may be 

viewed as a prepayment, albeit at a discount, of estate taxes (bonds as a form of life insurance), further 

complicates intertemporal comparisons. Similar complications are introduced by the treatment of pensions 

and annuities. 

5 
the measure of the estate tax rate employed. A concluding comment is provided in 

section V. 

II. Background 

Federal estate tax revenues grew steadily in the post-war period. As shown in Figure 1 

and Table 1, estate tax revenues grew from near a billion in 1948 to $25 billion in 2000. 

Adjusted for inflation, however, the implied growth rate is less impressive.7

 Real tax 

revenues grew through the early 1970s, and precipitately declined in the following years. 

It was not until the late 1990s that the real levels of the early 1970s were attained. When 

stated relative to GDP (Figure 2), or relative to household net worth as in Figure 3, 

revenues grew over the years but never regained the peak collections of the early 1970s. 

On average, estate taxes represent one quarter of one percent of GDP, and less than one 

tenth of one percent of the Flow of Funds household wealth. 

Studying the revenue streams depicted in Figures 1-3 is not directly helpful in gauging 

the effects of taxes on accumulated wealth. In particular, economic growth and the 

evolving structure of the estate tax make it rather difficult to gauge such effects. While 

inflation adjusted estate tax revenues grew by 376 percent in this period, for instance, the 

real gross domestic product grew by some 500 percent and US Household net worth and 

the S&P index grew even faster. 

As for the estate tax structure, major changes in tax regimes took place in 1977, 1982 

through 1987, and to a lesser extent in 1998 and beyond.8

 The size of exempted estate 

from estate taxation remained at $60,000 through 1976. The exemption was replaced by a 

unified tax credit which effectively doubled the exemption in value in 1977, and greatly 

expanded it between 1982 and 1987 to $600,000. In real terms, however, the exemption 

7 Again, these actually refer to fiscal years 1949 and 2001. Tax collections usually lag liabilities, reflecting 

filing requirements. Estate tax collection data is obtained from the IRS Annual Report of the Commissioner 

(various years) as well as the IRS Data Book (various years). 

8 These include the Tax Reform Act of 1976 (TRA76), the Economic Recovery and Tax Act of 1981 

(ERTA81), and the Taxpayer Relief Act of 1997 (TRA97). 

6 
fell in value in the early years, expanded from 1977 through 1987, and then fell again as 

shown in Figure 4. Other things equal, this had the effect of expanding the tax base in the 

earlier as well as later years. 

In this period under study, the maximum estate tax rate was reduced from 77 to 70 

percent in 1977. It was further reduced to 55 percent, but leaving much of the schedule 

for lower brackets intact. The introduction of the unified credit, however, effectively 

reduced the marginal tax rates in the lowest brackets to zero. 

Another significant tax reduction took place in 1982, when spousal transfers became 

exempt from tax. In 1981 and prior years, the deduction for spousal bequests was limited 

to 50 percent of the estate (as first introduced by the Revenue Act of 1948). But because 

spousal transfers may potentially enlarge the estate of the surviving spouse, they do not 

necessarily escape taxation.9

 This, at least in part, may explain the growth in revenues in 

the late 1980s and 1990s as more and more of the estates of surviving spouses became 

subject to the estate tax. Table 2, which reports information on the life expectancy of 

surviving spouses, illustrates the potential for recapture of the expanded marital 

deduction. And Figure 5 depicts the effective rate for the unlimited marital deduction pre 

and post ERTA81.10 

III. Modeling the effects of estate taxation 

Much of the wealth held by the very wealthy becomes subject to the estate tax at death. In 

many ways, the tax can be viewed as an excise tax on large bequests. This tax, which 

applies once to accumulated savings, is not directly comparable to the income tax which 

may apply annually to the return on savings. More specifically, the burden of the estate 

9 Throughout this period state Elder Laws, which dictate pre-set amounts or shares of estates to be set aside 

for the surviving spouse, were also changing further confounding the measurement of the effects of estate 

taxation. 

10 This represents an attempt to control for statutory changes in the allowed marital deduction. Of course 

there is no guarantee that the surviving spouse won’t spend down her wealth. To make post 1981 data 

comparable to prior years, the marital deduction for this period is set equal to 0.5 + 0.5*(1-m) of the estate, 

where m is the cumulative probability of death of the surviving spouse. 

7 
tax, unlike that of the income tax, may vary with the rate of return and the age of the 

bequest motivated saver. 

To facilitate comparisons, this “excise” tax on bequests can be restated as an equivalent 

income tax that applies to annual accruals of the income on savings. Assuming the 

bequest motive is the sole purpose for saving, a wealth holder is indifferent between an 

estate tax that applies to bequests at death and a lifetime annual equivalent income tax on 

the return to accumulated wealth that leaves the size of transfers to the heirs unaltered. 

Algebraically, with a marginal estate tax rate e, estate tax equivalent income tax rate τ, 

expected rate of return r, and life expectancy or holding period n, we should expect the 

following to hold for wealth saved today: 

(1 + r)

n

(1 − e) = [1 + r(1 −τ )]

n (1) 

That is, an individual may save $1 today and leave (1+r)n

(1-e) to his heirs in period n. 

Under an equivalent income tax regime, the heirs receive [1+r(1-τ)]n

. The latter term, i.e., 

r(1-τ) is commonly used in modeling the effects of income taxes on saving. From this 

identity, the estate tax equivalent income tax rate becomes: 

τ = (1 + r) − (1 + r)(1 − e)

1/ n

(2)

r

From equation (2) it follows that, for a given estate tax rate, the equivalent income tax 

rate declines with life expectancy and the expected rate of return. Alternatively stated, 

older individuals face a higher equivalent income tax rate. But this rate is lower when 

higher rates of return are expected.11 

11 The challenge here is to derive economy wide tax rate to capture differences in life expectancies. 

Joulfaian (2004b) applies mortality rates to estate tax data to arrive at such a measure. In many ways this is 

similar to that of Poterba (1997) who applied mortality rates to the living population. 

8 
Figure 6 illustrates the influence of age and rates of return on the measured equivalent 

income tax rate. Consider a male individual expecting to face an estate tax rate of 55 

percent. For an individual age 21, with a rate of return of 10 percent on assets and life 

expectancy of 54.6 years, the equivalent income tax rate on annual earnings is 16 percent. 

This declines to 7 percent when a rate of return of 25 percent is expected. The respective 

tax rates become 68 and 31 percent, respectively, in the case of a 71 year old male with a 

life expectancy of 12.5 years. 

In order to derive equivalent income tax rates some measure of the rate of return expected 

over the remaining life expectancy is needed. For simplicity, in any given year, this 

measure is defined as the maximum of the 10-year moving average rate of return to 

equity, measured as the growth rate of the S&P index, and that of after-tax bond yield. 

The latter is proxied by the municipal bond yield.12 Figure 7 plots this expected rate of 

return. 

Identifying the tax regime in effect for estate planning purposes is critical. I start with a 

10-year lag, but also consider a number of other lags as well. The taxable estate weighted 

age for decedents in 1998 was about 81.7 years. Life expectancy, again weighted by the 

size of taxable estates, but evaluated at ten years before death is 15 years.13 Given that the 

wealthy experience lower mortality rates than those of the general population (Poterba, 

2001),14 as well as the five year differential above, the life expectancy is more likely to be 

closer to 20 years. Thus, the equivalent income tax rate is derived using n=20 in equation 

(2), but n=15 is also considered.15 

12 Much of the return on equity can be avoided by the step up in basis at death. Replacing municipal bonds 

with taxable corporate bonds has little effect on the findings. 

13 This is computed using the general population life expectancy. See 

http://www.cdc.gov/nchs/data/nvsr/nvsr52/nvsr52_14.pdf. 

14 For mortality rates of annuitants, which are much lower than those of the general population, see 

http://library.soa.org:8080/xtbml/tableList.zip. 

15 The empirical findings are little affected when n=15 years is employed. Ideally life expectancy should 

vary by the age of the wealth holder, and using a representative measure of life expectancy may lead to 

aggregation bias. 

9 
To generate the income tax rates, I first employ the maximum estate tax rate. One 

drawback of this measure is that it may overstate the expected tax rate faced by the less 

wealthy. As an alternative, I also employ a predicted estate tax rate measure computed 

using mean taxable estate values. The latter is derived using a taxable estate of $2.2 

million reported by the estates of decedents in 1998. The primary limitation of the latter 

approach is that it overlooks the reductions in the maximum tax rates that took place over 

time. And, second, it is difficult to properly identify the representative size of wealth as it 

is likely to be endogenous to the tax regime in place. Figures 8 and 9 plot the estate tax 

rates in effect over the period 1948 through 2000, along with the derived measures of the 

equivalent income tax rates using the rates of return in Figure 7. 

IV. Empirical Findings 

To gauge the effects of estate taxation, I employ data on federal government estate tax 

collections for the fiscal years 1949 through 2001. These years correspond to transfers or 

tax liability in calendar years of 1948 through 2000. First, the stream of revenues is 

normalized by the estate tax rate, net of the state death tax credit rate, to generate proxies 

for the taxable estates. The latter is then divided by the Flow of Funds household net 

worth, represented in the dashed line in Figure 3. Next, I regress this ratio, multiplied by 

100, on the estate tax equivalent income tax rate, τ, as defined in (2). 

For the regressors, I begin with a measure based on the maximum estate tax rate, and 

employ a number of control variables. The latter include the real size of the exempted 

estate. Expansions in the exemption amount should reduce the size of the dependent 

variable. I also control for the amount of spousal bequests accorded a marital deduction, 

measured as a fraction of the estate. The greater the fraction of the estate allowed as a 

marital deduction the smaller is our dependent variable. Other variables include the S&P 

index to control for stock market appreciation. This index also controls for the effects of 

corporate and personal capital gains taxes in as far as they affect the return to holding 

corporate equity. Table 3 provides descriptive statistics. 

10
 
Beginning with column one of Table 4, the estimated coefficient on the tax rate is 

negative with a value of -0.025 (se=0.004). Evaluated at the sample mean value of the 

share of wealth, the taxable estate elasticity with respect to the tax rate is -0.18.16 This 

suggests, with the usual caveats, that in the absence of the estate tax, taxable estates may 

increase by 18 percent. 

Moving to the control variables, the size of the estate exemption, as expected, has a 

dampening affect on the reported taxable estates and the ensuing estate tax revenue. The 

estimated coefficient is -0.024 (se=0.006). Similarly, and as expected, the marital 

deduction has a dampening effect on the taxable estate. The estimated coefficient is -0.04 

(se=0.02). 

Adding a trend variable, or actually year, has little effect on the above estimates, except 

for the marital deduction where the coefficient is no longer statistically significant 

(column 2). Little change is also observed in these estimates when the S&P index is 

considered (column 3). The estimated coefficient on the index is positive, and, not 

surprisingly, suggests that estate tax wealth rises when the S&P index appreciates. The 

estimated coefficient on the tax rate is -0.0192 (0.0085), and implies an elasticity with 

respect of the tax rate of -0.14. 

Alternative lags were considered for the specification in column 3. Only the nine-year lag 

was statistically significant, with almost identical estimates. Of course, ideally all the 

lagged tax rates should be included in the right hand side as wealth is accumulated over 

the life cycle. Unfortunately, the correlation between these rates prevents estimation with 

such a specification. 

In column 4 the equivalent income tax rate is replaced with the 10 year lagged estate tax 

rate. Unlike the previous estimates, the estimated coefficient is now imprecisely 

measured, with a value of 0.027 (se=0.041). Even though the income tax rate equivalent 

16 The elasticity is computed by multiplying the estimated coefficient on the tax rate by the inverse of the 

wealth share. The mean wealth share, multiplied by 100, is 0.1392 as in table 3. 

11 
measure is derived using the same measure of the estate tax rate, the estimated effects 

diverge, highlighting the importance of the rates of return as predicted in equation (2). 

One possible limitation of the estimates in Table 4 is that the maximum tax rate may not 

be the margin at which some plan their estates. As such, the tax rates may be measured 

with error for these individuals. As an alternative, the predicted measure of tax rates is 

employed. As a reminder, this measure is based on an average taxable estate of $2.2 

million in 1998, and is adjusted for inflation to generate measures of marginal tax rates 

for the entire sample period. 

These estimated coefficients, now reported in Table 5, are significantly different from 

those reported earlier. They all retain the same sign, but increase in significance and size. 

Beginning with column 1 of Table 5, the estimated coefficient on the tax rate is -0.076 

(se=0.021), implying an elasticity of taxable estates with respect to tax rates of -0.33. The 

estimated elasticity changes little, and becomes -0.27, when year and the S&P index are 

included. These estimates also change little when nine and eight year lags are considered, 

but become insignificant when lags under eight years are considered. 

Given that US household wealth itself might be endogenous to taxes, the estimated 

elasticities reported in Tables 4 and 5 may be biased. 17 Estate tax decedents may very 

well be representative of the wealthiest segment of the living population. Thus, as an 

alternative to the above estimates, columns 3 and 4 in Tables 4 and 5 are re-estimated 

with the dependent variable defined as the log of real taxable estates. The results are 

reported in Table 6. 

In column 1 of Table 6, the estimated coefficient on the equivalent income tax rate is -

0.14, and almost statistically significant at the 5 percent level. In this constant elasticity 

specification, the coefficient implies an elasticity of taxable bequests with respect to the 

tax rate of -0.14, identical to that in column 3 of Table 4. In column 2, the tax rate 

17 Even those not sufficiently wealthy to be subject to taxation, may be affected by the estate tax. 

Interestingly, a recent CBS News/ New York Times poll found that 71 percent of Americans favored 

eliminating the tax. http://www.cbsnews.com/stories/2001/03/14/politics/main278884.shtml. 

12 
variable is based on the predicted estate tax rate. The estimated effect of the tax rate is 

virtually unchanged, and again implies an elasticity ofm-0.14. This, however, is in 

absolute terms smaller than the -0.27 reported in column 3 of Table 5. Columns 3 and 4 

replace the equivalent income tax rate with the estate tax rate directly. Again, and as in 

column 4 of Tables 4 and 5, the estimated effects of the estate tax rate are not precisely 

measured. 

V. Conclusion 

This paper explored the effects of estate taxation on bequests using time series data for 

the period 1948 through 2000. It derives an income tax equivalent measure of the estate 

tax rate which allows for the effects of estate taxes to vary with the expected rate of 

return. 

Depending on the specification employed, the estimated elasticity of the taxable estate 

with respect to the equivalent income tax rate is between -0.14 and -0.27. In other words, 

and with the usual caveats, the taxable estate is 14 to 27 percent smaller because of the 

estate tax.18 However, there is greater support for the finding of an elasticity of -0.14. As 

with much of the work on the taxable income elasticity, it is not clear whether this 

measures the effects on saving and wealth accumulation, or reflects tax avoidance 

(Slemrod, 2001). As one example, minority discounts claimed on estate tax returns filed 

in 2001 reduce taxable estates by about three percent. In the absence of the estate tax, 

there will be no longer a need to engage in estate planning and employ strategies 

designed to reduce the reported value of assets. Nevertheless, and as pointed out by 

Feldstein (1999), both types of response reflect a welfare cost of estate taxation. 

18 Note that some of the reduction in taxable estates may be recaptured under the income tax. Inflated 

executor commissions paid to a relative, for instance, are taxed under the income tax as compensation. 

Similarly, undervaluation of estates may lead to greater capital gains realizations by the heirs. 

13 
References 

Auerbach, Alan (2001). “Comments: The Impact of the Estate Tax on Wealth 

Accumulation and Avoidance Behavior,” in Rethinking Estate and Gift Taxation, 

William G. Gale, James R. Hines Jr., and Joel Slemrod, editors, Washington, DC: The 

Brookings Institution Press. 

Auten, Gerald and Robert Carroll (1999). “The Effect of Income Taxes on Household 

Behavior," Review of Economics and Statistics, November, 81 (4), 681-693. 

Bernheim, B. Douglas, (1999) “Taxation and saving,” NBER Working Paper 7061. 

Bernheim, Douglas B. (1987). “Does the Estate tax Raise Revenues?” in Tax Policy and 

the Economy 1, National Bureau of Economic Research, Cambridge, Massachusetts. 

Carroll, Robert (1998). “Do Taxpayers Really Respond to Changes in Tax Rates? 

Evidence from the 1993 Act," Office of Tax Analysis Working Paper 78, U.S. 

Department of Treasury. 

Chapman, Kenneth, Govind Hariharan, and Lawrence Southwick Jr. (1996). “Estate 

Taxes and Asset Accumulation,” Family Business Review 9 (Fall), 253-68. 

Clotfelter, Charles T. (1985). Federal Tax Policy and Charitable Giving, University of 

Chicago Press, Chicago. 

Feldstein, Martin S. (1995). “The Effect of Marginal Tax Rates on Taxable Income: A 

Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, June, 103 (3), 

551-572. 

Feldstein, Martin S. (1999). “Tax Avoidance and the Deadweight Loss of the Income 

Tax,” Review of Economics and Statistics, November, 4 (81), 674–680. 

Fiekowsky, Seymour (1966). “The Effects on Saving of the United States Estate and Gift 

Tax,” in Federal Estate and Gift Taxes, edited by Carl Shoup, Washington, DC: 

Brookings Institution. 

Gale, William G. and Maria G. Perozeh (2001). “Do estate Taxes Reduce Saving?” in 

Rethinking Estate and Gift Taxation, edited by William G. Gale, James R. Hines, and 

Joel Slemrod, Washington, DC: Brookings Institution. 

Gruber, Jon and Emmanuel Saez (2002). “The Elasticity of Taxable Income: Evidence 

and Implications," Journal of Public Economics, April, 84 (1), 1-32. 

Holtz-Eakin, Douglas and Donald Marples (2001). “Distortion Costs of Taxing Wealth 

Accumulation: Income Versus Estate Taxes,” NBER Working Paper No. 8261, April. 

14
 
Internal Revenue Service, Data Book, various years. 

Internal Revenue Service, Annual Report of the Commissioner of the Internal Revenue, 

various years. 

Joulfaian, David (2005). "Choosing between Gifts and Bequests: How Taxes Affect the 

Timing of Wealth Transfers,” forthcoming in Journal of Public Economics, NBER 

working paper 11025. 

Joulfaian, David (2004a). “Gift Taxes and Lifetime Transfers: Time Series Evidence," 

Journal of Public Economics, 88:9-10, August, 2004, 1917-1929. 

Joulfaian, David (2004b). “How Estate Taxes Can be Stated as Income Tax Equivalent 

Taxes,” Office of Tax Analysis, US Department of the Treasury, June, mimeo. 

Joulfaian, David (1998). “The Federal Estate and Gift tax: Description, Profile of 

Taxpayers, and Economic Consequences,” OTA Paper no. 80, U.S. Department of the 

Treasury, December. 

Kopczuk, Wojciech (forthcoming). “Tax Bases, Tax Rates and the Elasticity of Reported 

Income,” Journal of Public Economics. 

Kopczuk, Wojciech and Emmanuel Saez (2004). “Top Wealth Shares in the United 

States, 1916-2000: Evidence from Estate Tax Returns,” National Tax Journal, lvii:2, Part 

2, 445-487. 

Kopczuk, Wojciech, and Joel Slemrod (2001). “The Impact of the Estate Tax on Wealth 

Accumulation and Avoidance Behavior,” in Rethinking Estate and Gift Taxation, 

William G. Gale, James R. Hines Jr., and Joel Slemrod, editors, Washington, DC: The 

Brookings Institution Press. 

Poterba, James (2001). “Estate and Gift Taxes and Incentives for Inter Vivos Giving in 

the US,” Journal of Public Economics, 79(1), January, pp. 237-64 

Poterba, James (1997). The Estate Tax and After-Tax Investment Returns, NBER 

working paper 6337, Cambridge, Massachusetts. 

Roosevelt, Franklin D. (1938). The Public Papers and Addresses, v.5, Random House, 

New York, 312-14 

Slemrod, Joel (2001). “A General Model of the Behavioral Response to Taxation,” 

International Tax and Public Finance, 8(2), 119-28. 

15
 
Figure 1. Federal Estate Tax Revenues ($millions) 

30,000 

25,000 

20,000 

15,000 

10,000 

5,000 

0
 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
 

Year 

Nominal Real, 1982-1984=100 

Figure 2. Estate Tax Revenues as Percent of GDP 

0.00% 

0.10% 

0.20% 

0.30% 

0.40% 

0.50% 

0.60% 

0.70% 

0.80% 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Estate Tax Taxable Estate 

16
 
Figure 3. Estate Tax Revenues as Percent of Household Net Worth 

0.00% 

0.05% 

0.10% 

0.15% 

0.20% 

0.25% 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Estate Tax Taxable Estate 

Figure 4. Estate Tax exemption 

0 

100,000 

200,000 

300,000 

400,000 

500,000 

600,000 

700,000 

800,000 

900,000 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Exemption Real Exemption: 82-84=100 

17
 
Figure 5. Marital Deduction 

0.00 

0.25 

0.50 

0.75 

1.00 

1.25 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Percent of Est

ate 

Effect ive St atutory 

Figure 6. Estate Tax Equivalent Income Tax Rates 

(by Age and Rate of Return) 

0 

20 

40 

60 

80 

100 

120 

21 26 31 36 41 46 51 56 61 66 71 76 81 

Age 

Inco

me Tax Rate (%) 

10% 15% 20% 

18
 
Figure 7. Rates of Return 

-30% 

-20% 

-10% 

0% 

10% 

20% 

30% 

40% 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Expect ed S&P 

Figure 8: Maximum Estate and Equivalent Income Tax Rates 

10 

60 

110 

160 

210 

260 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Percent 

Income Tax Rate Estate Tax Rate 

Figure 9. Estate and Equivalent Income Tax Rates Valued at Mean Estate 

0 

10 

20 

30 

40 

50 

60 

70 

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 

Year 

Percent 

Income Tax Rate Estate Tax Rate 

19
Table 1 

Estate Tax Revenues ($millions) 

Year* Nominal Real** Year* Nominal Real** 

1948 719.3 2,984 1975 4,784.3 8,893 

1949 649.2 2,728 1976 5,551.1 9,756 

1950 616.8 2,559 1977 5,145.6 8,491 

1951 735.4 2,829 1978 5,236.1 8,031 

1952 774.3 2,922 1979 6,172.9 8,503 

1953 862.2 3,229 1980 6,571.3 7,975 

1954 836.2 3,109 1981 7,883.0 8,672 

1955 1,047.6 3,909 1982 5,904.3 6,118 

1956 1,240.1 4,559 1983 5,858.3 5,882 

1957 1,259.1 4,481 1984 6,145.7 5,915 

1958 1,215.8 4,207 1985 6,577.5 6,113 

1959 1,418.9 4,876 1986 6,990.0 6,378 

1960 1,725.1 5,828 1987 7,167.6 6,309 

1961 1,777.0 5,943 1988 7,915.5 6,691 

1962 1,951.2 6,461 1989 9,371.8 7,558 

1963 2,088.7 6,826 1990 9,903.1 7,577 

1964 2,424.8 7,822 1991 10,099.3 7,415 

1965 2,619.0 8,314 1992 11,140.5 7,940 

1966 2,692.2 8,309 1993 13,136.3 9,091 

1967 2,679.3 8,022 1994 12,965.0 8,748 

1968 3,097.6 8,901 1995 14,975.0 9,826 

1969 3,205.2 8,734 1996 17,136.0 10,922 

1970 3,303.4 8,514 1997 20,787.0 12,951 

1971 5,072.6 12,525 1998 23,136.0 14,194 

1972 4,280.1 10,239 1999 24,926.0 14,962 

1973 4,594.2 10,347 2000 24,441.0 14,193 

1974 4,235.6 8,591 

* Lagged fiscal years, proxy for calendar year liabilities. 
 

** Using CPI 82-84=100. 
 

Source: Internal Revenue Service, Annual Report of the Commissioner, various 
 

years, and Data Book, various years. 
 

20
 
Table 2 
 

Life Expectancy of Surviving Spouses 
 

Relative 

Years* 
 Frequency 

<1
 0.042 

1
 0.063 

2
 0.064 

3
 0.054 

4
 0.066 

5
 0.059 

6
 0.054 

7
 0.058 

8
 0.047 

9
 0.033 

10
 0.034 

11
 0.031 

12
 0.026 

13
 0.027 

14
 0.025 

15
 0.025 

16
 0.022 

17
 0.020 

18
 0.021 

19
 0.016 

20
 0.016 

21
 0.013 

22
 0.017 

23
 0.019 

24
 0.012 

25
 0.014 

26
 0.015 

27
 0.010 

28
 0.013 

29
 0.007 

30
 0.013 

30+
 0.064 

Cumulative Relative 
 

Frequency 
 

0.042
 

0.105
 

0.169
 

0.223
 

0.289
 

0.348
 

0.402
 

0.459
 

0.506
 

0.539
 

0.573
 

0.604
 

0.630
 

0.656
 

0.681
 

0.706
 

0.729
 

0.748
 

0.770
 

0.785
 

0.802
 

0.815
 

0.832
 

0.851
 

0.863
 

0.877
 

0.892
 

0.903
 

0.916
 

0.923
 

0.936
 

1.000
 

* Distance between deaths of first and second spouse. 

Obtained from estate tax returns of decedents in 1995. 

21
 
Table 3 
 

Descriptive Statistics 
 

Variable Mean Std Dev Min Max 

Year 1974 15.44345 1948 2000 

Estate Tax ($mil) 6,359 6,270 617 24,926 

Taxable Estates ($mil) 14,622 16,751 1,011 63,913 

Percent of GDP (%) 0.4836 0.0928 0.3439 0.7379 

Percent of Household Net Worth (%) 0.1392 0.0232 0.0994 0.2209 

Maximum Estate Tax Rate (%) 68.74 10.08 55.00 77.00 

Net Estate Tax Rate (%) 52.74 10.08 39.00 61.00 

Equivalent Income Tax Rate (%) 81.66 44.74 28.48 219.84 

Exemption Amount 240,645 240,870 60,000 675,000 

Real Exemption 267,146 114,421 105,448 528,169 

Marital Deduction (%) 59.3 14.2 50.0 97.9 

S&P Index 228 316 15 1,427 

S&P Moving Average Growth Rate 0.09 0.04 0.00 0.16 

Expected Rate of Return (r) 0.09 0.03 0.03 0.16 

Real GDP ($Bil) 4,711 2,316 1,634 9,817 

Household Net Worth ($Bil) 10,580 11,553 894 42,332 

CPI 73.21 50.00 23.80 172.20 

Tax Variables Computed at Mean Taxable Estate 

Taxable Estate ($mil) 17,269 14,784 2,084 60,795 

Percent of GDP (%) 0.7973 0.2897 0.3917 1.4519 

Percent of Household Net Worth (%) 0.2329 0.0897 0.1110 0.4346 

Estate Tax Rate (%) 38.30 6.73 32.00 49.00 

Net Estate Tax Rate (%) 33.37 4.84 28.80 41.80 

Equivalent Income Tax Rate (%) 31.15 10.61 14.82 59.26 

22
 
--

--

--

--

-- 

-- 

--

--

--

--

--

--

--

--

Table 4 
 

The Determinants of the Ratio of Taxable Estates to Household Wealth, 1948-2000 
 

(Using maximum estate tax rate; coefficients followed by standard errors in parentheses) 
 

Variable (1) (2) (3) (4) 

Intercept 0.4556* 

(0.0682) 

1.0417* 

(0.4766) 

1.0449* 

(0.4720) 

0.3635 

(0.6762) 

ln Estate Tax Rate t-10 0.0272 

(0.0409) 

ln Equivalent Income Tax 

Rate t-10 

-0.0248* 

(0.0044) 

-0.0282* 

(0.0052) 

-0.0192* 

(0.0085) 

ln (Real Exemption) -0.0235* 

(0.0062) 

-0.0195* 

(0.0069) 

-0.0261* 

(0.0085) 

-0.0332* 

(0.0084) 

Marital Deduction % -0.0398* 

(0.0192) 

-0.0304 

(0.0205) 

-0.0212 

(0.0215) 

-0.0280 

(0.0242) 

ln Real S&P 0.0129 

(0.0098) 

0.0340* 

(0.0082) 

Year -0.0003 

(0.0003) 

-0.0003 

(0.0003) 

0.0000 

(0.0003) 

Elasticity 

Adjusted R2 

-0.18 -0.20 -0.14 0.20 

0.7136 0.7175 0.7230 0.6883 

Observations (regression) 42 42 42 42 

* Significant at the 5 percent level, ** at the 10 percent level. 

23
 
--

--

--

--

-- 

-- 

--

--

--

--

--

--

--

--

Table 5 
 

Determinants of the Ratio of Taxable Estates to Household Wealth, 1948-2000 
 

(Using a predicted estate tax rate; coefficients and standard errors in parentheses) 
 

Variable (1) (2) (3) (4) 

Intercept 1.5901* 

(0.2355) 

7.7784* 

(0.7981) 

9.0923* 

(0.9089) 

8.8519* 

(1.8742) 

ln Estate Tax Rate t-10 -0.1083 

(0.1132) 

ln Equivalent Income Tax 

Rate t-10 

-0.0765* 

(0.0206) 

-0.0873* 

(0.0129) 

-0.0624* 

(0.0156) 

ln (Real Exemption) -0.1090* 

(0.0195) 

-0.0422* 

(0.0148) 

-0.0721* 

(0.0182) 

-0.1035* 

(0.0215) 

Marital Deduction % -0.1617* 

(0.0595) 

-0.1136* 

(0.0376) 

-0.0573 

(0.0416) 

-0.0412 

(0.0493) 

ln Real S&P (0.0369* 

(0.0145) 

0.0825* 

(0.0163) 

Year -0.0036* 

(0.0005) 

-0.0042* 

(0.0005) 

-0.0040* 

(0.0008) 

Elasticity 

Adjusted R2 

-0.33 -0.37 -0.27 -0.47 

0.8475 0.9463 0.9481 0.9274 

Observations (regression) 42 42 42 42 

* Significant at the 5 percent level, ** at the 10 percent level. 

24
 
--

--

--

--

-- 

-- 

--

--

Table 6 

Determinants of the ln Real Taxable Estates, 1948-2000 
 

(Coefficients and standard errors in parentheses)
 

Variable (1) (2) (3) (4) 

Intercept 10.2904* 

(1.4998) 

10.0271* 

(1.4973) 

9.8077* 

(1.5330) 

10.3568* 

(1.8043) 

ln Estate Tax Rate t-10 -0.2136 

0.5426 

0.3816 

0.5601 

ln Equivalent Income Tax 

Rate t-10 

-0.1377** 

(0.0776) 

-0.1372** 

(0.0823) 

ln (Real Exemption) -0.2746* 

(0.1191) 

-0.2714* 

(0.1190) 

-0.2499* 

(0.1232) 

-0.2528* 

(0.1232) 

Marital Deduction % -0.5512* 

(0.2041) 

-0.5638* 

(0.2041) 

-0.4776* 

(0.2075) 

-0.4733* 

(0.2079) 

ln Real S&P 0.4279* 

(0.1037) 

0.4434* 

(0.1042) 

0.4411* 

(0.1107) 

0.4338* 

(0.1119) 

Elasticity 

Adjusted R2 

-0.14 -0.14 -0.21 0.38 

0.9066 0.9064 0.8992 0.8994 

DW 2.1028 2.055 2.0084 2.0088 

Columns (1) and (2) replicate column (3) in Tables 4 and 5, while (3) and (4) replicate 

column (4) in Tables 4 and 5. Estimates corrected for autocorrelation with AR(1). 

* Significant at the 5 percent level, ** at the 10 percent level. 

25
 
Recent OTA Working Papers 

http://www.treas.gov/offices/tax-policy/library/otapapers/index.shtml 

Number Authors Title Date 

95 David Joulfaian Basic Facts on Charitable Giving 06/05 

94 Curtis P. Carlson The Effect of the 2001 Recession and Recent 

Tax Changes on the Corporate Alternative 

Minimum Tax 

06/05 

93 Curtis P. Carlson The Corporate Alternative Minimum Tax, 

Aggregate Historical Trends 

06/05 

92 David Joulfaian Estate Taxes and Charitable Bequests: Evidence 

from Two Tax Regimes 

03/05 

91 Warren B. Hrung Information, the Introduction of Roths, and IRA 

Participation 

12/04 

90 Janet G. McCubbin Optimal Tax Enforcement: A Review of the 

Literature and Practical Implications 

12/04 

89 Scott Jaquette 

Matthew Knittel 

Karl Russo 

Recent Trends in Stock Options 03/03 

88 Peter Brady 

Julie-Anne Cronin 

Scott Houser 

Regional Differences in the Utilization of the 

Mortgage Interest Deduction 

08/01 

87 Robert Rebelein 

Jerry Tempalski 

Who Pays the Individual AMT? 06/00 

86 David Joulfaian Choosing Between Gifts and Bequests: How 

Taxes Affect the Timing of Wealth Transfers 

05/00 

85 Julie-Anne Cronin U.S. Treasury Distributional Methodology 09/99 

84 Laura Power 

Mark Rider 

The Effect of Tax-Based Savings Incentives on 

the Self-Employed 

07/99 

83 Joann Weiner Using the Experience in the U.S. States to 

Evaluate Issues in Implementing Formula 

Apportionment at the International Level 

04/99 

82 Rev. Nicholas Bull 

Janet Holtzblatt 

James R. Nunns 

Robert Rebelein 

Defining and Measuring Marriage Penalties and 

Bonuses 

11/99 

81 Rev. Jerry Tempalski Revenue Effects of Major Tax Bills 07/03 

81 Jerry Tempalski Revenue Effects of Major Tax Bills 12/98 

80 David Joulfaian The Federal Estate and Gift Tax: Description, 

Profile of Taxpayers, and Economic 

Consequences 

12/98 

79 Robert Carroll Do Taxpayers Really Respond to Changes in Tax 

Rates? Evidence from the 1993 Tax Act 

11/98 

26