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Estate taxes, consumption externalities, and altruism

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Author Info
Alonso-Carrera, Jaime
Caballé, Jordi
Raurich, Xavier

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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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Publisher 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. Francisco Alvarez-Cuadrado & Ngo Van Long, 2009. "Envy And Inequality," Departmental Working Papers 2009-03, McGill University, Department of Economics. [Downloadable!]
  2. Barnett, Richard C & Bhattacharya, Joydeep & Bunzel, Helle, 2008. "Deviant Generations, Ricardian Equivalence, and Growth Cycles," Staff General Research Papers 12939, Iowa State University, Department of Economics. [Downloadable!]
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