Saturday, July 31, 2010

Inheritance and Economic Growth

I am reading an interesting paper by Thomas Piketty on inheritance and economic growth. It's a long paper with lots of stuff in it. But here is the key point. They construct time series for inheritance (both bequests and inter-vivos transfers) for France over almost 200 years. One source is French estate tax data and the other a model of demography, saving etc. The gap between the two series (representing tax evasion) is relatively small and constant over time:

Annual flows of inheritance averaged 20% of national income in the 19th century but fell to as low as 5% of national income in the mid-20th century. Since then the share has risen again to around 15%. These numbers are huge - intergenerational transfers are around the same magnitude as the savings rate. Part of the explanation for the U-shaped trajectory is changes in economic growth rates over time. In periods of fast economic growth inheritances from the past poorer generation become less significant. Similarly, savings rates are high in fast growing economies like China partly because the old are not dissaving much compared to what the young are saving. Of course, inequality was also lower in the mid-20th century but was that a result of the low role of inheritances and the high role of current labor income as well as progressive income taxation or also a result of the high economic growth rate? Perhaps progressive income taxation is "easier to get away with" when inequality is lower anyway and growth is faster?

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