The Sentimental Propagation of Lottery Winnings: Evidence from the Spanish Christmas Lottery (with Evi Pappa and Morteza Ghomi)

[Paper] [Online App] Journal of Monetary Economics, Volume 143, 103-525, April 2024

This paper shows that family firms are used as vehicles for inheritance tax avoidance among the wealthy and assesses their implications for the effective taxation of wealth. Exploiting a major tax reform in Catalonia (Spain) that widened the tax gap between favored and non-favored assets, I document a shift in inherited wealth toward business assets, driven entirely by equity in family firms. This pattern is consistent with affluent testators transferring financial and non-productive assets to existing firms as capital contributions before death, with heirs unwinding their positions in privately held firms precisely when the mandatory holding period expires. Linking inheritance and wealth tax records, I estimate that this behavior reduces combined inheritance and wealth tax revenues by 10\% annually, primarily through inheritance tax losses. The findings underscore that preferential tax treatment of business assets within broad wealth tax systems can result in substantial fiscal losses and undermine effective wealth taxation.

This paper studies the impact of inheritance taxation on intragenerational wealth mobility. To do so, I exploit rich variation in tax rates across Spanish regions resulting from the decentralization of this tax to regional governments. Using household panel data from the Spanish Survey of Household Finances, I document that higher inheritance taxes significantly and persistently reduce heirs’ wealth mobility at the lower part of the net wealth distribution. These wealth mobility responses to higher taxes are explained by less wealthy heirs decreasing their financial wealth and increasing their personal credit debt. Liquidity constraints and some particularities of the tax enforcement help rationalize the rise in personal credit debt at the time of the tax payment. Illiquidity of inheritances helps explain the lasting negative effects of taxes on bottom-wealth mobility, as delays in selling inherited real estate amplify the negative effects of taxes on personal credit debt and financial wealth of less wealthy heirs.