How do inheritances shape wealth inequality ? Theory and evidence from Sweden
Inheritances reduce relative measures of wealth inequality according to recent evidence
from several countries. Using a theoretical model and Swedish administrative data, we
first show that this counter-intuitive finding can be explained by high intergenerational
wealth mobility and low inheritance inequality relative to wealth inequality. We then
exploit two quasi-experiments: randomness in the timing of death and an inheritance
tax repeal. We find that the equalizing effect of inheritances is short-lasting and reverted
within a decade since less wealthy heirs deplete their inherited wealth rapidly in contrast
to more affluent heirs. This depletion represents a constant reduction in annual savings
equivalent in size to 10% of the average inheritances amount. 70% of this additional annual
non-labor income are allocated to consumption (half of it is car purchases) in the first
years, compared to 90% in later years. The remaining 30% (or 10%) reflect a considerable
albeit declining labor supply elasticity with respect to inheritances. Taken together, our
findings suggest that inheritance taxation can reduce long-run wealth inequality solely
through the taxation of very large inheritances.