Taxing the great wealth transfer

Advanced economies are undergoing the largest intergenerational transfer of wealth in recent history. High asset prices and an ageing population mean the flow of inheritances and gifts is increasing rapidly. Growing wealth transfers and slow economic growth mean that transfers are on track to make up a growing share of younger generations’ lifetime resources, strengthening the link between parental background and economic opportunities. The growing importance of parental wealth raises the prospect that transfers in early adulthood are of increasing importance in determining opportunities in housing and labour markets. How should public policy, and particularly the taxation of wealth transfers, respond to these trends? Assessing the impacts of transfer taxation on redistribution and welfare is not straightforward because individuals may respond to taxation in various ways, including by changing the size and timing of transfers, and because the effect of receiving a transfer may be complex and depend on the situation of the receiver. This research would answer three related questions: What are the effects of receiving wealth transfers on career and housing decisions, and wealth accumulation? How do intergenerational transfers respond to taxation? How does the design of transfer taxation affect the distributions of wealth and income over the lifecycle? To answer these questions, we will use an unrivalled population-level administrative dataset that measures wealth, income, and intergenerational wealth transfers and which is linked across generations. We will analyse how the receipt of wealth transfers in early adulthood impacts key choices around career, homeownership, and wealth accumulation. In the setting we examine, there have been several reforms to the taxation of gifts and inheritances. These allow us to understand the effect of taxation on the size and timing of transfers made. Finally, using a state-of-the-art economic model of transfers over the lifecycle, we will quantify the effect of transfer taxation reforms on inequality and welfare. Answering these research questions will be a major advance in academic understanding of the effect of wealth transfer taxation and provide new insights into the effect of transfer taxation on inequalities. The research will make it possible to model changes in inheritance tax rates or thresholds, alternative tax treatment of lifetime gifts, and special tax treatment of transfers for home purchase. The findings of the research would be written up in academic research papers and policy-relevant summaries. The insight provided by this research are of utmost relevance to policymakers concerned with the design of wealth transfer taxation, access to homeownership and labour market opportunities, and social mobility. This project will build on the policy networks of the research team to disseminate findings through meetings with civil servants, the writing of comments, blogs and policy briefs, podcast appearances and social media content. We will hold online webinars launching the research papers and hold two high-profile policy roundtables with relevant researchers and civil servants to discuss the implications of our research. A key part of the research program will be the development of the project lead to become a leading independent researcher. This will be facilitated through a program of training, mentorship and career development, drawing on the experience and expertise of the project mentors but also the wider IFS research community. In turn, the project lead will be responsible for developing the skills of the junior researchers working on this project.