Inheritance Taxes and Human Capital Accumulation

The paper examines the relationship between inheritance taxation and human capital formation. We analyze the standard problem in three different settings and show that the results are sensitive to modeling specifications. The relation of human capital to physical capital and the accumulation rate of both types of capital may be affected by the inheritance tax or not, depending on the perspective of an agent. If human capital is intangible and proxied by wages, the inheritance tax on physical capital detrimentally impacts wages which may indirectly decrease human capital accumulation. If, on the other hand, human capital is purposefully formed by forward-looking economic agents, the rate of investment in human capital accumulation is not affected by the inheritance tax, but the ratio of human to physical capital in equilibrium is higher than it would be if the inheritance was not taxed. Finally, for short-term looking agents, the tax increases the rate of investment in human capital only if tax revenue is rebated to taxpayers. These results suggest that taxing inheritance, coupled with tax rebates, may act as an incentive to increase human capital accumulation. JEL E20, H21, H24, J24