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Who Gets Utility from Bequests? The Distributive and Welfare Implications for a Consumption Tax

Barbara H. Fried
Stanford Law Review
Vol. 51, No. 4 (Apr., 1999), pp. 641-681
Published by: Stanford Law Review
DOI: 10.2307/1229438
Stable URL: http://www.jstor.org/stable/1229438
Page Count: 41
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Who Gets Utility from Bequests? The Distributive and Welfare Implications for a Consumption Tax
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Abstract

Private savings which are transferred intergenerationally through bequests make up a substantial portion of the U. S. capital stock. Most of these bequests do not get spent down by heirs and in fact usually increase in size as they are transferred to successive generations. In addition, bequests are over-whelmingly concentrated among the very wealthy. With this backdrop, Professor Barbara Fried engages in two related inquiries: First, who derives utility from bequests (donors, heirs, successive generations)? Second, what implications does this have for projecting the winners and losers from changing the taxation of savings, specifically in a shift from the income tax to a consumption tax? In order to determine who gains utility from bequests, Professor Fried first analyzes the various motives for bequest savings. These motives include the altruistic model, in which the donor gives out of generosity towards family members; the precautionary savings model, in which consumers save as a hedge against unforeseen contingencies and then bequeath whatever they do not consume; and the exchange model, in which a parent bequeaths money to a child in exchange for the child's care and services as the parent grows older. Professor Fried concludes that, under most theories of bequest motives, the level of bequests will increase under a consumption tax. For bequests that are disguised exchanges, the resulting increase in bequests will be used to finance a higher level of preclusive consumption for the donor generation, thereby generating utility for the donor generation only. For bequests motivated by altruistic and precautionary concerns, in contrast, the donor realizes at least a portion of the utility from bequest savings in a nonpreclusive form. As a result, any increase in bequests will generate increased utility for both donor and donee. A model that takes into account the double-level utility gains from increased bequest savings is likely to magnify the aggregate welfare gains from shifting to a consumption tax, as compared to the results reported by traditional models. It is also likely to magnify the distributional benefits of such a shift to the wealthiest five percent of Americans, who account for the majority of bequest savings.

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