Behavioral Responses to Estate Taxation: Evidence from Taiwan
What is this research about and why did you do it?
Despite growing documentation about the role of inheritance in wealth concentration, wealth-transfer taxes are falling out of favor. In the past two decades, over ten OECD countries have abolished estate or inheritance taxes. This shift reflects ongoing debates about the behavioral responses to these taxes. While proponents argue they promote equality, critics contend they create distortion and encourage avoidance, undermining their effectiveness in reducing inequality. However, empirical evidence on this issue remains limited. This paper seeks to address this gap by examining how individuals respond to estate tax changes and exploring the mechanisms behind these adjustments.
How did you answer this question?
We use detailed administrative data and rich policy variation in Taiwan, linking estate tax records to full-population wealth and income data. To estimate the effect of estate tax changes, we exploit two reforms: a tax cut replacing progressive rates with a flat rate and a tax increase restoring a progressive schedule. Using a difference-in-difference approach, we compare individuals with pre-reform estates above the reform threshold (treated) to those below it (control). Since estates are observed only upon death, pre-reform estates for individuals dying post-reform are unobservable. We address this by constructing counterfactual estates using exhaustive pre-reform wealth and demographic data.
What did you find?
We find a rapid, persistent, yet asymmetrical response in reported estates to the two reforms. A 1% change in the net-of-tax rate led toa 2.76% change in reported estates following the tax increase and a 1.31% change after the tax cut. This asymmetry arises because liquid assets respond more strongly during a tax increase. The quick adjustments in reported estates, combined with no labor supply effects among donors and heirs, suggest tax avoidance as the main driver. Sunk costs explain the asymmetry: taxpayers increase avoidance during a tax increase but respond less to a tax cut due to previously incurred avoidance costs.
This figure displays the trend in reported estates before and after the 2017 tax increase (left panel) and the 2009 tax cut (right panel). In both reforms, there are no pre-trend differences between the treated and control groups. The responses to the reforms are both rapid and persistent.
What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?
Our findings highlight that estate taxation can only effectively reduce inequality if enforcement gaps, such as offshore tax evasion, are addressed through stronger third-party reporting and international collaboration. In addition, the asymmetry in taxpayers’ responses to estate tax increases versus cuts emphasizes the need for policies that account for these behavioral dynamics. This asymmetry, driven by sunk costs in avoidance strategies, may also apply to other taxes, such as corporate income and wealth taxes, which are critical for addressing wealth concentration.
What are the next steps in your agenda?
We plan to further investigate how estate taxation affects the investment decisions of taxpayers’ firms. We also aim to examine how estate taxes shape the gender dynamics of inheritance distribution, highlighting their broader implications for wealth inequality.
