Principal investigator: Omar Barroso Khodr
Authors: Ulrich Glogowsky
Original title: Behavioral responses to inheritance and gift taxation: Evidence from Germany
Location of the Intervention: Germany
Sample Size: 1,3 million inheritances and 376 donations
Primary Variable of Interest: Elasticity (sensitivity of taxable transfers to the net tax rate)
Type of Intervention: Fiscal Measures on a Microeconomic Scale.
Methodology: Cluster estimation; Convexity tests; Elasticity tests; Utility tests
Summary
The effectiveness of inheritance and gift taxes depends on individuals' fiscal responsiveness. This article convincingly demonstrates how—and to what extent—the German inheritance and gift tax influences taxpayer behavior. To do this, it combines administrative data with variations in tax rates across brackets, characterized by a convex curve followed by a concave curve in the tax obligation. By applying a clustering approach to these double-curvature tables, the study documents that individuals adjust their taxable asset transfers according to the tax structure. In the case of inheritances, a specific type of response predominates: testators engage in estate planning. The magnitude of this response is comparable to that observed in inter vivos gifts. However, neither the general responses to gifts nor to inheritances significantly impact tax revenue. The short-term net elasticities associated with taxable asset transfers remain below 0,1, indicating that the effects on revenue are limited.
- Policy Problem
Based on the study, the author seeks to address several critical political issues related to wealth transfer taxes—specifically, inheritance and gift taxes. These issues occupy a central position in contemporary debates about the role of these taxes in revenue collection and inequality reduction.
The main political question is to assess the advisability and effectiveness of potential increases in inheritance and gift taxes. Policymakers and economists often advocate these taxes as instruments to increase revenue and promote wealth redistribution. However, their effectiveness depends directly on individual behavior in response to these measures. The author investigates these behavioral responses directly, asking: would individuals reduce their taxable transfers? Would donors resort to strategic testamentary planning? Would heirs underreport the values received? Such behaviors can reduce revenue and compromise the redistributive objectives of the tax. The study, therefore, provides crucial evidence to anticipate the real impact of policy proposals in this area.
A second fundamental question is understanding the specific channels and mechanisms by which individuals avoid taxes. The author goes beyond simply estimating responsiveness (elasticity) and seeks to identify how tax evasion occurs. The study investigates, in particular, whether this evasion occurs through:
- Strategic planning by donors (such as drafting personalized wills) versus incorrect statements made by heirs after death;
- The use of precise instruments, such as "specific testamentary donations," allows adjusting the transferred value to fit within more favorable tax brackets.
This diagnosis is essential for formulating effective policies, as closing tax loopholes requires precise knowledge of the mechanisms used. The finding that 82% of tax pooling stems from the use of specific testamentary donations by donors directs policymakers to specific points in the tax code that may require reform.
Finally, the study discusses the implications for inequality and for long-term policy design. By demonstrating that behavioral responses are moderate and that short-term adjustments are relatively small, the author argues that the fear that tax evasion strategies compromise the redistributive capacity of the tax seems unfounded. This suggests that wealth transfer taxes can be effective tools for redistribution without being significantly harmed by evasive behaviors—a positive sign for policymakers wishing to use them.
In summary, the author addresses the central political triad:
1. Is the tax effective? Yes, because the responses are moderate.
2. How is it avoided? Primarily through prior testamentary planning by donors, and not through post-mortem evasion by heirs.
3. What are the implications for inequality? The tax has the potential to fulfill its redistributive objectives.
- Policy Implementation Context
The study evaluates the inheritance tax in effect in Germany between 2002 and 2017, covering both inheritances and donations. According to the author, this system has several key characteristics that shape the analysis. Firstly, it is an inheritance tax, meaning that the tax liability falls on the recipient (heir). The tax base includes not only the immediate transfer but also any donations received from the same donor in the previous ten years, as a way to prevent tax evasion.
A critical institutional aspect is the distinction between statutory successions—in which the distribution of assets is determined by law—and personalized successions, in which the donor draws up a will. In wills, donors can distribute proportional portions of the estate or, more commonly, make specific bequests. That is, donations of a fixed value, such as a sum of money, which allow precise control over the taxable value.
The author points out that the tax tables are progressive and vary according to the degree of kinship between donor and beneficiary, with three classes offering more favorable rates for close relatives. A distinctive feature of these tables is their doubly articulated structure. Instead of a single transition point, there is a “transition area” between the intervals. This area begins with a convex curve—representing a sharp increase in the marginal rate—and ends with a concave curve—indicating a reduction. This format creates a complex incentive for taxpayers to cluster their declared transfers just below the start of the ascending curve. The study explores the 2009 and 2010 reforms, which shifted these inflection points, offering a quasi-experimental variation for analysis.
Finally, the context is marked by high tax literacy and rigorous oversight. Most testators use tax consultants, and a laboratory experiment confirms that individuals have a good understanding of the structure of tax tables. According to the author, oversight is robust, with detailed asset reports from third parties—especially financial assets, which represent more than half of inheritances—freezing of accounts after death, and official valuation of assets that are difficult to price, carried out by tax authorities. This control structure is essential because it restricts the possibility of underreporting by heirs, allowing the study to precisely isolate the role of pre-death planning carried out by donors.
- Evaluation Details
The assessment carried out by the study is based on a comprehensive and high-quality set of administrative data provided by the German Federal Statistical Office, particularly suitable for cluster analysis. This data covers all wealth transfers subject to tax assessment in the years 2002 and from 2009 to 2017, offering a broad and reliable basis for investigation.
A central characteristic of this dataset is its focus on the wealthiest segment of the population—specifically the top 30% in the distribution of wealth transfers (Bach et al., 2014). Furthermore, the data exhibit an exceptional level of detail, allowing the author to go beyond simply identifying the cluster and explore the mechanisms underlying this behavior. The granularity of the information includes data on the size, distribution, and asset composition of the estates and, crucially, makes it possible to distinguish between inheritances and donations, as well as between personalized wills and statutory successions.
The final analytical sample is extensive, encompassing approximately 1,3 million inheritances and 376 donations, allowing for a robust analysis of behavioral responses across different tax brackets and donor-beneficiary relationships.
- Method
The main methodological contribution of this study is the expansion of the standard "clustering" estimation framework to accommodate a double-twisted tax table. The author starts from a conventional economic model, in which donors obtain utility by transferring wealth, but face convex costs, generating a trade-offs between cost and benefit. The central parameter is elasticity, which measures the sensitivity of taxable transfers to the net tax rate (Chetty et al., 2011). The innovation lies in the modeling of a tax table that includes a "transition area" between brackets, characterized by two twists: a convex twist, where the marginal rate increases, followed by a concave twist, where this rate falls again.
The author demonstrates that taxpayer behavior in the face of this structure can be classified into two scenarios, according to their responsiveness. In Scenario 1 (lower elasticities), taxpayers react as if only the first convex twist existed. In this case, there is clustering at the initial point in the bend of the curve, and the standard single-twist elasticity formula applies. In Scenario 2 (higher elasticities), taxpayers interpret the table as if there were a notch—that is, a jump in the average tax rate. Here, the clustering is less pronounced and accompanied by a "hole" in the distribution just above the twist, requiring the use of a notch-based elasticity formula. A key element of the method is the so-called "knife-edge" elasticity, which separates the two scenarios and allows the researcher to choose the appropriate formula based on the initial clustering estimate.
To apply this theoretical framework, the author uses a widely established empirical clustering procedure. This process involves estimating the counterfactual distribution of taxable transfers—that is, how it would behave in the absence of twists—by fitting a flexible polynomial to the data, excluding the region near the twist point. The observed excess mass (clustering) in this excluded region is then quantified and converted into an estimate of how much the average “marginal clusterer” reduced its transfer. Finally, this value is inserted into the corresponding elasticity formula (Scenario 1 or Scenario 2), resulting in the final elasticity estimate.
This comprehensive approach offers a new tool for estimating behavioral responses in real-world tax systems that exhibit similar complex and multifaceted structures.
- Main results
According to the author, the study presents clear and robust evidence that individuals strategically adjust their wealth transfers in response to inheritance and gift taxes—a behavior known as “pooling.” This response, however, is not homogeneous. A central finding is the marked heterogeneity according to the degree of kinship between the donor and the beneficiary. Substantial pooling is observed in transfers to close relatives, some pooling to other family members, and minimal or no pooling in transfers to individuals with no family ties. This pattern applies to both inheritances and lifetime gifts, although pooling is systematically more intense in gifts.
The analysis confirms that this pooling is a direct and timely response to tax incentives. Following the 2009 tax reform, which modified tax brackets, surplus taxpayers rapidly redistributed themselves around the new inflection points. This reallocation occurred almost immediately in the case of donations, and within two years in the case of inheritances, demonstrating that the responses are predominantly short-term. Furthermore, the distributions do not show gaps (missing mass) just above the distortion points, suggesting that individuals precisely adjust the declared value of transfers to position themselves exactly at the most advantageous tax threshold—rather than simply reducing the amount transferred.
In this way, the study quantifies the degree of clustering, demonstrating that the density of taxpayers at distortion points can be up to 14,5 times higher than expected in the absence of tax incentives. Although gross clustering is higher at the upper distortion points for donations, this pattern does not necessarily hold when the magnitude of the response is converted into standardized elasticity estimates. Despite changes in tax tables over time, the clustering behavior observed in the oldest data (2002) remains statistically consistent with subsequent years, reinforcing the persistence of this tax evasion pattern.
The study concludes that the pooling observed in inheritances is primarily driven by deliberate testamentary planning undertaken by donors before their death, and not by incorrect declarations made by heirs afterward. The main evidence is that pooling occurs exclusively when donors draft personalized wills (58% of transfers), being completely absent in non-personalized statutory successions. Furthermore, in personalized wills, pooling is almost entirely (82%) explained by the strategic use of “specific bequests”—situations where the donor bequeaths a specific item or amount of fixed value, allowing for precise adjustments to position the transfer just below a higher tax bracket.
The study also rules out the hypothesis of incorrect declarations after death, demonstrating that the values attributed to assets that are difficult to assess evolve continuously among the suspected cases, and, more importantly, that the significant clustering persists even in estates composed exclusively of financial assets declared by third parties — over which the heirs have no direct control for underreporting (Brockmeyer, 2014).
Behavioral responses are characterized as occurring at the “intensive margin”—that is, donors adjust the values specified in existing wills, rather than acting at the “extensive margin,” such as drafting a new will or including additional heirs based on taxation. When quantified, elasticities—which measure the sensitivity of transfers to tax rates—prove to be moderate. They are higher for donations than for inheritances, and higher for close relatives than for other beneficiaries, but all remain relatively low, indicating that donors are not highly responsive to wealth transfer taxes. The most sensitive category is that of specific inheritances, although even in this case the elasticities are modest.
- Lessons in Public Policy
This study offers significant contributions to public policy studies by presenting a comprehensive analysis of how individuals react to wealth transfer taxes, with a specific focus on Germany. Its main innovation lies in surpassing the limited scope of most existing literature, which generally focuses on isolated assets or specific tax evasion schemes. Instead, this article adopts a broader perspective, revealing the responses of all agents involved—donors and beneficiaries—through various channels of adjustment of taxable transfers, such as tax evasion and tax avoidance. This holistic approach provides policymakers with a more complete picture of behavioral reactions to inheritance and gift taxes.
A key finding, and one of great relevance for policymaking, is the identification and quantification of "testamentary planning" as a widespread and hitherto little-explored response margin. According to the author, the study demonstrates that this planning frequently occurs on the deathbed, which has direct implications for the timing and execution of tax policies. Furthermore, by providing joint and comparable estimates for legacies and donations, the research offers valuable insights for designing tax systems that address these two forms of wealth transfer coherently. The results also indicate that tax planning is especially motivated when close relatives are affected, suggesting behavioral factors such as aversion to the taxation of family assets—which can influence how policies are communicated and structured.
From a methodological standpoint, the study presents straightforward tools for policy analysis by expanding the "clustering" estimation technique to double-twist tax tables, common in real-world systems like the German one. This framework allows for more precise estimates of taxable income elasticities in complex fiscal contexts, making it applicable to other public policy scenarios. Finally, the combined use of different methods—including reform analysis, decomposition techniques, and laboratory experiments—reinforces the robustness of the conclusions, such as the finding that tax responses occur predominantly in the short term. By demonstrating that the small elasticities observed stem from strategic will planning, and not from a lack of responsiveness, the study guides policymakers toward more effective and enforceable tax legislation.
References
Bach, S., Houben, H., Maiterth, R., Ochmann, R., 2014. Aufkommens-und Verteilungswirkungen von Reformalternativen für die Erbschaft-und Schenkungsteuer. Politikberatung kompakt 83, 1–160.
Brockmeyer, A., 2014. The investment effect of taxation: evidence from a corporate tax kink. Tax Stud. 35(4), 477–509.
Brookings, 2020. Taxing Wealth Transfers Through an Expanded Estate Tax. https://www.brookings.edu/research/taxing-wealth-transfers-through-an-expandedestate-tax/ (accessed: 2020-08-12).
Chetty, R., Friedman, J., Olsen, T., Pistaferri, L., 2011. Adjustment costs, firm responses, and micro vs. macro labor supply elasticities: evidence from Danish tax records. QJ Econ. 126(2), 749–804.
