Is Leaving Your Kids A Bundle Good For The Economy

"The parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and worthy life." So wrote Andrew Carnegie in 1891, expressing an opinion that many have cited in arguing for higher taxation of large inheritances.

Now, three economists have examined how Carnegie's observation holds up in the real world. In a new National Bureau of Economic Research study, Douglas Holtz-Eakin of Syracuse University, David Joulfaian of the Treasury Dept., and Harvey S. Rosen of Princeton University analyzed tax returns for the period 1982 through 1985 of some 4,300 people who received inheritances in 1982 and 1983.

They found that the higher the inheritance, the more likely a person was to reduce his labor force participation. A person inheriting more than $150,000, for example, is four times more likely to stop working than someone receiving less than $25,000. And high-inheritance families that remained in the labor force experienced lower earnings growth than low-inheritance families.

In other words, the evidence indicates that Carnegie was right. And since the inhibiting effects on work effort lasted three years, "it wasn't just a question of someone throwing a party after receiving a large bequest and then resuming his old work habits," notes Rosen.

Does that mean that raising taxes on big inheritances would result in more work effort and thus benefit the economy? Not necessarily, says Rosen. "To answer that question, we also have to know how much people who have made a bundle would reduce their own work effort and savings if they couldn't pass on as much to their heirs."

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