While tax avoidance has been identified as the primary behavioral response to inheritance and gift taxation, relatively few is known about the potentially negative externalities of inheritance and gift tax avoidance on production, employment and output of firms being transferred from one generation to the next. In this paper, we study the effect of business gift tax avoidance on firm growth and employment in Germany. Since 2009, the German inheritance and gift tax law creates an incentive to downsize before a firm transfer. We estimate excess separations before ownership transfer of family firms to quantify the efficiency cost of inheritance and gift tax avoidance in Germany, where family firms represent the backbone of the economy. We find that affected firms cut 5 to 20% of firm size before firm transfer.

Wealth transfer taxes are important instruments to counter increasing wealth inequality. Yet, inter-generational business transfers, whose distribution is particularly concentrated at the top, are inherently difficult to tax. This is due to preferential tax treatments in many countries and sophisticated tax avoidance strategies by business owners. We analyze how business transfers react to anticipated changes in such preferential tax treatment using German administrative gift tax return data. We find strong timing responses of business transfers to expected tax changes, particularly for large transfers of business wealth. We further estimate that the amount of foregone gift tax revenue due to timing responses is up to 2.8 times the size of actual annual inheritance and gift tax revenue.

This paper studies tax-minimizing behavior of wealthy individuals. Drawing on the universe of inheritance tax returns filed in Catalonia, I study tax-minimizing strategies to an increase in effective tax rates faced by heirs at the top 5% of the inheritance distribution. To identify causal effects, I use a difference-in-difference design comparing wealthy descendants to spouse inheritors who were barely affected by the policy change. After the tax reform, wealthy descendants inherit a higher fraction of tax-favored assets and report lower taxable inheritances. This shift in the asset composition of inheritances is explained by a sharp increase in the proportion of wealthy descendants inheriting equity shares in family business. Wealthy testators seem to create family business to relabel financial and real estate wealth into business assets. The change in the asset composition of inheritances accounts for 52% of the forgone tax revenue associated to the behavioral responses elicited by the reform

Empirical research has established that privately held firms are used to respond to various tax margins. A separate strand has shown that income given or passed on to children responds to gift and inheritance taxation. This paper shows new evidence that privately held firms are additionally used to provide income to underage children, creating considerable inequalities among children. We show that individuals who own firms and are located in the top 0.1% of the income distribution, are seven times more likely to have underage children as co-owners in their firm, compared to the bottom 90%. The mean age of these children is 12 years, and ownership occurs at all ages between 0-17. Underage children who own firms earn such high incomes that would allow them to accumulate wealth to place them near the median wealth of middle-aged single adults.