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Estate taxes, consumption externalities, and altruism

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  • Alonso-Carrera, Jaime
  • Caballé, Jordi
  • Raurich, Xavier

Abstract

We study how the introduction of consumption externalities affects the optimality of the dynamic equilibrium in an economy displaying dynastic altruism. When the bequest motive is inoperative consumption externalities affect the intertemporal margin between young and old consumption and thus modify the intertemporal path of aggregate consumption and capital. The optimal tax policy that solves this intertemporal suboptimality consists of a tax on capital income and a pay-as-you-go social security system. The latter solves the excess of capital accumulation due to the inoperativeness of the bequest motive and the former solves the suboptimal allocation of consumption due to consumption externalities. When the bequest motive is operative consumption externalities only cause an intratemporal misallocation of consumption but do not affect the optimality of the capital stock level. This suboptimal allocation of consumption implies in turn that the path of bequest deviates also from optimality. The optimal tax policy in this case consists of an estate tax and a capital income tax.

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Bibliographic Info

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

Volume (Year): 92 (2008)
Issue (Month): 7 (July)
Pages: 1751-1764

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:7:p:1751-1764

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

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  1. Stephen Turnovsky & Goncalo Monteiro, 2006. "Consumption Externalities, Production Externalities, and Efficient Capital Accumulation under Time Non-Separable Preferences," Working Papers UWEC-2006-26-P, University of Washington, Department of Economics.
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  3. Jaime Alonso-Carrera & Jordi Caballe & Xavier Raurich, 2004. "Aspirations, Habit Formation, and Bequest Motive," Working Papers 136, Barcelona Graduate School of Economics.
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Cited by:
  1. Monisankar Bishnu, 2011. "Linking consumption externalities with optimal accumulation of human and physical capital and intergenerational transfers," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 11-01, Indian Statistical Institute, New Delhi, India.
  2. Takeo Hori, 2011. "The effects of consumption externalities in an R&D-based growth model with endogenous skilled and unskilled labor supply," Journal of Economics, Springer, vol. 102(1), pages 29-55, January.
  3. Emmanuelle Augeraud-Veron & Mauro Bambi, 2012. "Does habit formation always increase the agents' desire to smooth consumption?," Discussion Papers 12/12, Department of Economics, University of York.
  4. Richard Barnett & Joydeep Bhattacharya & Helle Bunzel, 2013. "Deviant generations, Ricardian equivalence, and growth cycles," Economic Theory, Springer, vol. 52(1), pages 367-396, January.
  5. Francisco Alvarez-Cuadrado & Ngo Van Long, 2009. "Envy And Inequality," Departmental Working Papers 2009-03, McGill University, Department of Economics.
  6. Alvarez-Cuadrado, Francisco & El-Attar, Mayssun, 2012. "Income Inequality and Saving," IZA Discussion Papers 7083, Institute for the Study of Labor (IZA).
  7. Phu Nguyen-Van & Thi Kim Cuong Pham, 2008. "Endogenous Fiscal Policies, Environmental Quality, and Status-Seeking Behavior," Working Papers 29, Development and Policies Research Center (DEPOCEN), Vietnam.
  8. Pierre Pestieau & Emmanuel Thibault, 2012. "Love thy children or money," Economic Theory, Springer, vol. 50(1), pages 31-57, May.

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