Taxing Bequests and Consumption in the Steady State

38 Pages Posted: 13 Nov 2013

See all articles by Johann K. Brunner

Johann K. Brunner

University of Linz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Susanne Pech

Johannes Kepler University Linz - Department of Economics

Date Written: October 31, 2013

Abstract

We study the optimal tax system in a dynamic model where differences in wages induce differences in inheritances, and the transition from parent ability to child ability is described by a Markov chain. We characterize expected inheritances in the steady state and 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 effect depends on the reaction of bequests and on inequality aversion, while for the consumption tax the sign is always positive because the distorting effect is outweighed by the induced increase in wealth accumulation. A necessary condition for a positive welfare effect is the empirically validated relation that more able individuals on average have more able parents than less able individuals.

Keywords: optimal taxation, bequest tax, consumption tax

JEL Classification: H210, H240

Suggested Citation

Brunner, Johann K. and Pech, Susanne, Taxing Bequests and Consumption in the Steady State (October 31, 2013). CESifo Working Paper Series No. 4453, Available at SSRN: https://ssrn.com/abstract=2353323 or http://dx.doi.org/10.2139/ssrn.2353323

Johann K. Brunner (Contact Author)

University of Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz
Austria
(43 732) 2468 8248 (Phone)
(43 732) 2468 9821 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Susanne Pech

Johannes Kepler University Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz, 4040
Austria

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