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Capital income taxation when inherited wealth is not observable

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  • Cremer, Helmuth
  • Pestieau, Pierre
  • Rochet, Jean-Charles

Abstract

This paper extends the Atkinson-Stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics: productive ability and inherited wealth. Bequests are motivated by the "joy of giving". A child's inheritance is a random variable with a probability distribution that depends on his parent's investment in a "bequest technology". Public borrowing is assumed and implies the modified golden rule. We study the optimal tax policy when two instruments are available: a non-linear (wage) income tax and a proportional tax on capital income. We show that the second instrument ought, in general, to be used but that the tax rate is not necessarily positive. However, a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 87 (2003)
Issue (Month): 11 (October)
Pages: 2475-2490

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Handle: RePEc:eee:pubeco:v:87:y:2003:i:11:p:2475-2490

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Boadway, R. & Marchand, M. & Pestieau, P., . "Towards a theory of the direct-indirect tax mix," CORE Discussion Papers RP -1110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Arrondel, L. & Masson, A. & Pestieau, P., 1996. "Bequest and inheritance: empirical issues and France-U.S. comparison," DELTA Working Papers 96-19, DELTA (Ecole normale supérieure).
  3. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU, Pierre, 1997. "Redistribution with unobservable bequests: a case for taxing capital income," CORE Discussion Papers 1997070, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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  6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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  8. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
  9. CREMER, Helmuth & PESTIEAU , Pierre & ROCHET, Jean-Charles, . "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers RP -1528, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August.
  11. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  12. Pirttila, Jukka & Tuomala, Matti, 2001. "On optimal non-linear taxation and public good provision in an overlapping generations economy," Journal of Public Economics, Elsevier, vol. 79(3), pages 485-501, March.
  13. Pestieau, P. M., 1974. "Optimal taxation and discount rate for public investment in a growth setting," Journal of Public Economics, Elsevier, vol. 3(3), pages 217-235, August.
  14. Ulrike Vogelgesang, 2000. "Optimal Capital Income Taxation and Redistribution," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 57(4), pages 412-434, August.
  15. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
  16. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-77, June.
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