On the desirability of taxing bequests

Abstract

We consider an infinite-horizon economy populated by two types of individuals, some individuals being more productive than others. Individuals live one period and are altruistic toward their children. Assuming that the allocation received by a given individual depends only on his type and the one of his parent, we first determine the second-best steady state allocation and then study the optimal bequest and labor income tax functions, that are assumed to be independent. We first demonstrate that the second-best is not implementable with such tax schedules. We then show, through numerical simulations, that the taxation of bequests could go either way. In some cases, it is optimal to redistribute from high to low bequests, while in other cases, large bequests should be subsidized and low bequests should be taxed. These simulations also suggest that the case for taxing large bequests is stronger when individuals are sufficiently altruistic.

JEL codes

Reference

Georges Casamatta, “On the desirability of taxing bequests”, Journal of Economics, vol. 138, n. 3, April 2023, pp. 195–219.