The effects of estate and inheritance taxes on entrepreneurship

Despite its relatively small role in the federal taxation system—accounting for less than 1 percent of revenues— the estate and gift tax is controversial. This paper surveys evidence on the effect of estate and inheritance taxes on entrepreneurship and presents some new evidence. We use the Survey of Consumer Finances to examine how receipt of an inheritance affects the likelihood that an heir will own and manage a business and use the Health and Retirement Study to explore how the changing rules for wealth transfer taxation at the federal and state level affect the likelihood of continued self-employment. We find that receiving an inheritance increases the likelihood of owning and managing a business. The prospect of leaving an estate subject to taxation may reduce the likelihood of continued self-employment by encouraging retirement.