Indirect taxation and the welfare effects of altruism on the optimal fiscal policy

Carlos Garriga () and Fernando Sánchez-Losada

No 2009-047, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper analyzes the welfare effects of altruism on the optimal fiscal policy. The existence of positive bequests links present and future generations in the economy. We show that these altruistic links provide a new role for indirect taxation (consumption and estate taxes) with important welfare implications. We use three different altruistic approaches (warm-glow, dynastic, and family) to illustrate how the presence of bequests in the budget constraint of the donee gives the government the ability to use indirect taxation to mimic lump-sum taxation and to implement the first-best outcome in the long-run. This channel is not present in economies without altruism, such as the infinite-lived consumer economy or the overlapping generations economy, where long-run welfare is suboptimal and indirect taxation is irrelevant.

Keywords: Taxation; Fiscal policy (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
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Citations: View citations in EconPapers (1)

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Journal Article: Indirect taxation and the welfare effects of altruism on the optimal fiscal policy (2009)
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DOI: 10.20955/wp.2009.047

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