Taxing bequests and consumption in the steady state

Johann Brunner () and Susanne Pech ()

No 2017-17, Economics working papers from Department of Economics, Johannes Kepler University Linz, Austria

Abstract: We study the optimal tax system in a dynamic model where di¤erences in wages induce di¤erences in inheritances, and the transition from parent ability to child ability is described by a Markov chain. In accordance with empirical evidence, we assume that in any generation more able individuals are likely to have a more able parent, which implies that in the steady state they also tend to receive larger inheritances than less able individuals. We show that the Atkinson-Stiglitz result on the redundancy of indirect taxes does not hold in this framework. In particular, given an optimal income tax, a bequest tax as well as a consumption tax are potential instruments for additional redistribution. For the bequest tax the sign of the overall welfare e¤ect depends on the reaction of bequests and on inequality aversion, while for the consumption tax the sign is always positive because the distorting e¤ect is outweighed by the induced increase in wealth accumulation.

Keywords: Optimal taxation; estate tax; consumption tax; wealth transmission. (search for similar items in EconPapers)
Pages: 52 pages
Date: 2017-10
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-upt
Note: English
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http://www.econ.jku.at/papers/2017/wp1717.pdf (application/pdf)

Related works:
Working Paper: Taxing Bequests and Consumption in the Steady State (2013)
Working Paper: Taxing bequests and consumption in the steady state (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:jku:econwp:2017_17

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