Optimum Taxation of Inheritances

Abstract

We incorporate the fact that inheritances create a second distinguishing characteristic of individuals, in addition to earning abilities, into an optimum income taxation model with bequests motivated by joy of giving. We show that a tax on inheritances and a uniform tax on all expenditures including bequests are equivalent and that either is desirable, according to an intertemporal social objective, if on average high-able individuals have larger inherited endowments than low-able. We demonstrate that such a situation results as the outcome of a process with stochastic transition of abilities over generations, if all descendants are more probable to have their parent's ability rank than any other.

Keywords: Optimum taxation, taxation of inheritances, bequests, estate tax

JEL Classification: H21, H24