Cagri Kumru and Arm Nakornthab
We study the interaction between estate taxation and annuity demand both analytically and quantitatively. Our quantitative model is rich enough to capture the important features of the economy such as business investment, borrowing constraints, estate transmission, and wealth inequality. Having entrepreneurs in the model is essential to generate a realistic wealth distribution and analyze non-entrepreneurs (workers) and entrepreneurs' annuity demands separately.
The simple analytical model gives the direction of the relationship between estate tax rates and annuity demand: lower estate tax rates result in lower annuity demands. The quantitative model shows that annuity demand is indeed sensitive to the changes in the estate tax system. Removing the estate tax rate reduces the annuity demand substantially when the government's budget is balanced with an increase in the proportional income tax rate.
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