The Relationship Between Altruism and Equal Division: Evidence From Inter Vivos Transfer Behavior

Elin Halvorsen elin.halvorsen@ssb.no

Thor O. Thoresen

The opinions presented here are those of the discussant alone and may not represent the official position of the Internal Revenue Service or the U.S. Treasury Department.

Presentation Introduction and background Norwegian wealth transmission laws and inheritance tax

system The model The data Results Additional comments

Motivations for Intergenerational Transfers

Accidental Intentional

Altruistic Exchange or strategic Other

Equal sharing Societal norm Indicator of parental affection

Norwegian Wealth Transmission Laws

Children are guaranteed 2/3 of parents’ estate for amounts of up to 1 million kroner (kr) The 2/3 portion must be divided evenly among children

Remaining 1/3 may be distributed according to preferences Children, other family members Charities

Only 25 percent of Norwegians transfer assets through a will

Inter Vivos Transfer Restrictions

Gifts deemed “advance bequests” are subject to transmission laws and inheritance tax

Gifts not considered “advance bequests”Relatively small amountsNot subject to equal sharingTax-exempt

Inheritance Tax Structure

Applies to cumulative gifts and inheritance Special valuation rules to facilitate transfer of family

businesses Tax rates are progressive:

<200,000 200,000<500,000 ≥500,000

Inter-spousal 0% 0% 0%

Child/Parent 0% 8% 20%

Others 0% 10% 30%

The Model Authors seek to test the influence of an “Equal Sharing

Norm” on the altruistic model. Two testable hypotheses

The degree of income compensation should be stronger in one-child families

The altruism motive should dominate when income differences among children are large

The Model n

Parent consumption: cp = ep − ∑bi

i=1

Child consumption: ci = ei + bi i = 1,…, n

n nParent Utility: U = ln cp + α ∑ ln ci − ∑ γ/2 (bi – b)2 i=1 i=1

n n nMax: U = ln (ep − ∑ bi ) + α ∑ ln (ei + bi ) − ∑ γ/2 (bi – b)2 i=1 i=1 i=1

Subject to: bi > 0

Implications of model In absence of fairness attitude (γ=0), parents balance gifts

to equalize children’s consumption, taking income as given:b2 – b1 = e1 – e2

If parent’s derive utility from equal division (γ>0) then: b2 – b1 < e1 – e2

The larger the fairness parameter, γ, compared to altruism, α, the less parents compensate income differences between children

Transfer-income derivative: δbi – δbi = 1 δep δei

The Data Use data from a 2001 survey conducted by Norwegian

Social Research (NOVA) 1,877 households where HH was interviewed Wealth, income, employment for household and constituent

members Educational attainment, economic situation, etc., for

household member’s parents, in-laws, all grown children Transfers given and received within previous 12 months

Sub-sample : HH with grown children Respondent characteristics (donor role)

Sample size: 2,021 parent/child pairs Mean age respondent: 61 (40 - 93) Mean number of children: 3 Mean household income: 347,000 kr (0 – 1,200,000) Mean household net worth: 1,729,000 kr (-245,000 – 11,400,000) 23% made gifts Mean gift: 30,000 kr (80-85% < 40,000 kr)

Child characteristics Mean age: 43 (18 - 73) 49% female, 51% male 63% married/cohabitant; 56% had children 33% college/university degree 18% unemployed; 15% students Economic situation: 6% bad, 43% well

Sub-sample: HH with living parents Respondent characteristics (donee role)

Sample size: 1,263 Mean age: 38 (18-74) 70% married/cohabitant; 56% had children 16% unemployed; 13% students Economic situation: 10% bad, 54% well Mean household income: 421,000 kr (0 – 6,600,000) Mean household net worth: 1,290,000 kr (-740,000 – 13,020,000) 19% received gifts Mean 22,000 kr (80-85% gifts < 40,000 kr)

Parent characteristics Mean age parent: 65 (35 – 105) Mean number of children: 3.3 51% married

Q. What kind of economic obligation do you thinkparents should have towards their grown children?

All parents Donor parentsOnly in emergencies .68 .64Education, house and family formation .26 .33Same living standard as parents .04 .02

Q. When parents who have more than one child give economic support, how do you think they should divide the resources?

All parents Donor parentsEqual sharing .73 .67According to need .23 .29To the most helpful child .01 .02To the most able child .00 .01No of observations 1,512 348

Parent attitudes toward inter vivos transfers

Econometric Analysis Econometric Model

b*ij = η1epj + η2 ei +X β + uij

bij = b*ij if b*ij > 0

0 if b*ij ≤ 0 i = 1 …, N; j = 1,…, P Expect η1 – η2 = 1 Sample observations with no gifts include both future

donors/recipients and those who will never make gifts Do not have income and wealth for child and parent

together, so use both samples Use proxies for permanent and transitory income

{

Tobit Findings

Determinants of inter vivos gifts Significant negative effect of recipient income on amount of inter

vivos gifts Transfers decline as parents age Transfers smaller and more frequent when children younger Size of transfers decrease as number of children increase

Transfer-income derivative findings Transfer derivative higher for only-children = -.27 Derivative for children with siblings = -.03

Fitted Spline for Inter Vivos Gifts by Recipient Household Income

Flattens above child income mean

Household income (in thousands)

Income and Transfer Differences Among Siblings Parent is unit of observation Model: (bij – bj ) = γ Zpj + βk (xkij – xkj ) + εij

One child is the reference point Includes variables indicating contact with, and assistance

provided to, parent Results show only relevant variables are child’s relative

economic situation and employment status Unequal sharing declines with parent age and income, but

increases with number of children

Author Conclusions Parents are faced with trade-off between compensating

income differences among children and being fair Recipient income derivative higher for one-child families Recipient income derivative nonlinear for multiple-child

families Evidence suggests compensation when recipient income is below

the median Comparing sibling characteristics suggests relative

economic situation is main determinant of unequal division of gifts

Final Thoughts Use survey data on propensity to give? Does wealth taxation play a role?

Reduce taxable inheritance Transfer anticipated future gains

Effects of uncertainty? (Kotlikoff, et al., 2003) Data challenges

Time frame -12 months is short Estimate of accumulated/expected transfers; panel? Definition of gifts very broad

Parents’ ability to make gifts Consider interplay of motivations