This paper is an empirical investigation into the effect of bequest taxes (estate or inheritance tax, in the US) and inter vivos real estate donations taxes (gift tax, in the US) on (i) house prices, (ii) house donations, and (iii) market transactions. In a simple model with intergenerational altruism, a lower tax rate unambiguously increases (i) and has an ambiguous effect on (ii) and (iii). We test these predictions using an original and unique data set containing information on sales, donations and real estate prices in 13 large Italian cities between 1993 and 2004. This period spans a major reform that first decreased and then abolished the inter vivos real estate donations tax and bequest tax in Italy. We find that the reform is associated with cumulative real appreciation of about 5% between 2001 and 2004, an increase in donations, and a decrease in market transactions over the same period.
The tax was then reintroduced in 2006, but only on transfers above one billion Euros.
The surge in real estate prices had been a global phenomenon until 2007. According to the September 2004 World Economic Outlook, between 1997 and 2003 real estate prices in Australia, France, Ireland, Netherlands, Spain and the UK rose by more than 70%, while Italy and the US had experienced increase in excess of 30%. Italy stands as a noticeable exception: although it experienced a reduction in real interest rates like other countries in this group, it also experienced very low economic growth and demographic stagnation. Nevertheless, it displayed substantial real estate appreciation. This is an additional motivation to investigate the role of bequest taxation.
We show in Section 4 that in Bari, Catania, and Cagliari the number of donations was actually larger than market transactions.
Constantinides, Donaldson, and Rajnish (2007) point out the potentially important role of bequests for asset pricing in the context of the equity premium puzzle. Bernheim, Lemke, and Scholz (2004) show how agents react to tax incentives in the timing of intergenerational transfers. Recently, the theoretical connection between intergenerational transfers and estate taxation has received renewed attention in, among others, Kopczuk (2009), and Farhi and Werning (2007, 2010).
Although in this paper we do not make any normative claim about the optimal level of bequest taxation, Kopczuk (2009) pointed out that the normative analysis of the inheritance tax is very sensitive to what is assumed about the motivation of bequest. Ours is a positive investigation that can be generalized to all assets used to make intergenerational transfers. In particular, we believe that it is important to focus on real estate. In addition to being a crucial asset for intergenerational transfers, it also represents a sizable share of optimal portfolio strategy and a central element of most financial crises, as documented for instance in Fugazza, Guidolin, and Nicodano (2007) and Pelizzon and Weber (2008).
For a review of recent contributions, see Girouard et al. (2006) and Goodhart and Hofmann (2008).
This approach is subject to the limitations discussed by Kopczuk (2009): the specific type of bequest motive that is considered turns out to affect the welfare implications of bequest taxation.
We assume that a unit of house stock provides a unit of housing, so we use “house” and “housing” interchangeably.
Since this is a one-period model, there is no distinction between donations and bequests.
In virtually all fiscal systems bequests are taxed in the same way, no matter what their form is.
Notice that tax revenues would affect the equilibrium of the model only if their largest share were transferred to the elder generation.
Since transfers are taxed in the same way irrespective of the means, the first-order conditions for Hdon and D are identical and the composition of transfers in equilibrium is indeterminate.
For a study of the transitional dynamics of bequest behavior between different equilibria, see Grossmann and Poutvaara (2009).
Notice that Proposition 1 can be extended to any financial or real asset used for inter-generational transfers.
Corriere della Sera, October 26, 1999.
Corriere della Sera, December 15, 1999.
It is of course possible that some of these non-market transactions are actually disguised market transactions to evade house sale taxes. We cannot correct for this form of tax evasion.
We were able to retrieve this information only for year 2001. Given that we are considering existing units, the average is unlikely to vary much between 1993 and 2004.
To relate this analysis to the model, it is understood that we interpret our panel of annual data as generated by a sequence of overlapping generations, 1 born one year after the other.
Notice that the number of observations is sufficiently larger than the number of equations to make seemingly unrelated regression reliable.
In a few instances, clustering actually causes standard errors to decrease. In these cases we conservatively report the larger standard errors obtained when not clustering.
Our results are somehow consistent with those in Joulfaian (2004), who documents dramatic changes in the amount of gifts in the US in response to changes in the tax treatment of lifetime transfers, especially in the short run.
An earlier version of the paper has circulated under the title “Real estate prices and the importance of bequest taxation.” We are very grateful to Nomisma for an extensive dataset on real estate prices, to the Italian Ministry of the Economy and Public Finances for bequest and donation data, and to the Bank of Italy and Alberto Felettigh for inflation and mortgage rate data. We thank for helpful discussions Orazio Attanasio, Alberto Bennardo, Michele Boldrin, John Donaldson, Daniele Fabbri, Pietro Garibaldi, Christine Hauser, Andrea Ichino, Esteban Jaimovich, Chiara Monfardini, Giovanni Mastrobuoni, Mario Pagliero, and Guglielmo Weber. We are also grateful to an anonymous referee for very useful comments. Giovanni Prarolo, Jacopo Bizzotto and Francesco Scervini provided excellent research assistance. Taddei thanks CIBER at Columbia University and the University of Bologna for financial support, and Studio Trombetti for support and hospitality.
Abraham, M. J., and P. H. Hendershott. 1996. “Bubbles in Metropolitan Housing Markets.” Journal of Housing Research 7 (2): 191–207. Search in Google Scholar
Bernheim, D., J. R. Lemke, and J. K. Scholz. 2004. “Do Estate and Gift Taxes Affect the Timing of Private Transfers?” Journal of Public Economics 88 (12): 2617–2634. Search in Google Scholar
Bertocchi, G. 2011. “The Vanishing Bequest Tax: The Comparative Evolution of Bequest Taxation in Historical Perspective.” Economics and Politics 23: 107–131. Search in Google Scholar
Bruce, D., and D. Holtz-Eakin. 1999. “Fundamental Tax Reform and Residential Housing.” Journal of Housing Economics 8: 249–271. Search in Google Scholar
Cagetti, M., and M. De Nardi. 2009. “Estate taxation, Entrepreneurship, and Wealth.” American Economic Review 99 (1): 85–111. Search in Google Scholar
Case, E. K., and R. J. Shiller. 2003. “Is There a Bubble in the Housing Market?” Brookings Papers on Economic Activity 2: 299–342. Search in Google Scholar
Constantinides, M. G., B. J. Donaldson, and M. Rajnish. 2007. “Junior is Rich: Bequests as Consumption.” Economic Theory 32 (1): 125–155. Search in Google Scholar
Farhi, E., and I. Werning. 2007. “Inequality and Social Discounting.” Journal of Political Economy 115 (3): 365–402. Search in Google Scholar
Farhi, E., and I. Werning. 2010. “Progressive Estate Taxation.” Quarterly Journal of Economics 125 (2): 635–673. Search in Google Scholar
Fugazza, C., M. Guidolin, and G. Nicodano. 2007. “Investing for the Long-Run in European Real Estate.” Journal of Real Estate Finance and Economics 34 (1): 35–80. Search in Google Scholar
Girouard, N., M. Kennedy, P. J. van den Noord, and C. André. 2006. “Recent House Price Developments: The Role of Fundamentals.” OECD Economics Department Working Papers, no. 475. Search in Google Scholar
Glaeser, L. E., J. Gyourko, and R. E. Saks. 2005a. “Why is Manhattan So Expensive? Regulation and the Rise in Housing Prices.” Journal of Law and Economics 48: 331–369. Search in Google Scholar
Glaeser, L. E., J. Gyourko, and R. E. Saks. 2005b. “Why Have Housing Prices Gone Up?” American Economic Review 95 (2): 329–333. Search in Google Scholar
Goodhart, C., and B. Hofmann. 2008. “House Prices, Money, Credit, and the Macroeconomy.” Oxford Review of Economic Policy 24 (1): 180–205. Search in Google Scholar
Grossmann, V., and P. Poutvaara. 2009. “Pareto-improving Bequest Taxation.” International Tax and Public Finance 16: 647–669. Search in Google Scholar
Hendershott, H. P., and G. Pryce. 2006. “The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest.” Journal of Urban Economics 60 (1): 50–68. Search in Google Scholar
Himmelberg, C., C. Mayer, and T. Sinai. 2005. “Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions.” Journal of Economic Perspectives 19 (4): 67–92. Search in Google Scholar
Jappelli, T., M. Padula, and G. Pica. 2010. “Estate Taxation and Intergenerational Transfers.” CSEF Working Paper 243. Search in Google Scholar
Joulfaian, D. 2004. “Taxes and Lifetime Transfers: Time Series Evidence.” Journal of Public Economics 88(9–10): 1917–1929. Search in Google Scholar
Kopczuk, W. 2009. “Economics of Estate Taxation: A Brief Review of Theory and Evidence.” Tax Law Review 63 (1): 139–157. Search in Google Scholar
McCarthy, J., and R. W. Peach. 2004. “Are Home Prices the Next Bubble?” Federal Reserve Bank of New York Economic Policy Review, December, 1–17. Search in Google Scholar
Pelizzon, L., and G. Weber. 2008. “Are Household Portfolios Efficient? An Analysis Conditional on Housing.” Journal of Financial and Quantitative Analysis 43 (2): 401–431. Search in Google Scholar
Poterba, M. J. 1984. “Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach.” Quarterly Journal of Economics 99 (4): 729–752. Search in Google Scholar
Poterba, M. J. 1991. “House Price Dynamics: The Role of Tax Policy and Demography.” Brookings Papers on Economic Activity 2: 143–183. Search in Google Scholar
Smith, H. S., and G. Smith. 2006. “Bubble, Bubble, Where is the Housing Bubble.” Brookings Papers on Economic Activity 1: 1–50. Search in Google Scholar
Terrones, M. 2004. “The Global House Price Boom.” In The World Economic Outlook: The Global Demographic Transition, Chapter 2, 71–89. International Monetary Fund (IMF). Search in Google Scholar
©2013 by Walter de Gruyter Berlin Boston