New Report Says Legacy May Stall Heirs' Motivation

IN 1891, steel mogul Andrew Carnegie wrote in an essay that "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 less worthy life than he otherwise would."

Economists have not had much success proving this thesis, Princeton University economist Harvey Rosen notes.

But now, Mr. Rosen, together with Douglas Holtz-Eakin of Syracuse University and David Joulfaian of the United States Treasury, have devised a test of the "Carnegie conjecture."

They matched an Internal Revenue Service sample of estate tax records for people who died in 1982 with the beneficiaries' personal income tax returns for 1982 and 1985. Returns in which the age of the filer was less than 19 or greater than 58 years in 1982 were deleted from the sample. That way the impact of an inheritance could not be confused with normal retirement.

What they found was that those receiving large inheritances are more likely to drop out of the work force. For example, a single person who inherits more than $150,000 (it could be millions of dollars) is roughly four times more likely to leave the labor force than a person inheriting a sum below $25,000. Eighteen percent of heirs receiving the big inheritances drop out; 4.5 percent of those with the small inheritances; and 10 percent of those in the middle - between $25,000 and $150,000.

The paper, published by the National Bureau of Economic Research, has not addressed the issue of whether those departures from the labor force are permanent or temporary.

Nonetheless, since other economic studies have indicated that about 60 percent of wealth is inherited, Rosen sees the study as having some significance when legislatures consider the question of estate taxes. Massachusetts, for example, this past summer passed a bill abolishing estate taxes in stages over the next few years. Massachusetts legislators were concerned that too many senior citizens were leaving the state for other states without estate taxes, seeking to avoid Massachusetts estate taxes.

The paper takes no position on the equity aspects of estate taxes. Opponents of these taxes usually argue that estate taxes discourage work by the living who wish to leave their wealth to their children or other heirs. Proponents of estate taxes will have new ammunition for their position. They will be able to say that not only do estate taxes level the playing field of life by reducing inherited income inequality, but that such taxes could increase national work effort.

Rosen and his colleagues note some byproducts of their study. It provides evidence that leisure is a valued commodity. Some other economic studies had found that those receiving large amounts of unearned income (dividends, interest, etc.) were no more likely to take extra leisure than those with little such income. So leisure, in the term of economists, was dubbed "an inferior good." Rosen says that unearned income does not predict whether an individual will prefer leisure to work.

The new study, Rosen says, could be relevant to the design of welfare programs by its indication of the value of leisure as versus work. It also weakens the argument of some economists that tax hikes or cuts have no impact on the economy because people take offsetting measures through their market purchases.