Optimal Taxation of Bequests in a Model with Initial Wealth*

Abstract

We formulate an optimal‐taxation model where parents leave bequests to their descendants for altruistic reasons. In contrast to the standard model, individuals differ not only in earning abilities, but also in initial (inherited) wealth. In this model, a redistributive motive for an inheritance tax – which is equivalent to a uniform tax on all expenditures – arises, given that initial wealth increases with earning abilities. The introduction of the inheritance tax either increases intertemporal social welfare or has an ambiguous effect, depending on whether the external effect related to altruism is accounted for in the social objective.

The Bequest Tax as Long-Term Care Insurance

“…But with > 0 the well-known issue of double counting arises: welfare of the second generation occurs twice, as part of parent utility and as a separate goal. As a consequence of this double counting there is a case for a subsidy on bequests, because they create a positive external e¤ect, as mentioned in the Introduction (for a discussion see also Brunner and Pech 2012b). They provide twofold utility, for the donating parent as well as for the receiving descendant.…”

Age‐related taxation of bequests in the presence of a dependency risk

“…This literature has shown how important it is to distinguish between the different motives that induce (heterogenous) agents to leave some bequests to their heirs and how it may affect the design of optimal wealth transfer taxation. 3 Recently, Piketty and Saez (2013) and Garcia-Miralles (2020) have underlined the importance of considering alternative social welfare criteria on the optimal design of inheritance taxation in settings where individuals are heterogeneous in terms of bequests tastes, labour productivities and wealth. We use some of these insights in our model, by considering agents with different income and demographic characteristics, as well as different bequest motives and different social welfare criteria.…”

How Should Capital Be Taxed? Theory and Evidence from Sweden

“…Taken together, these aspects create stronger reasons to tax inheritance. 22 Piketty and Saez present simulations where inheritance taxes up to 50-60 percent are optimal and argue that their results can explain 21 See also Brunner and Pech (2012) for an extension. 22 For mathematical reasons, Piketty and Saez restrict attention to a linear inheritance tax.…”