Inheritance taxation in a model with intergenerational time transfers

We consider a two-period overlapping generation model with rational altruism a la Barro, where time transfers and bequests are available to parents. Starting from a steady state where public spendings are nanced through taxation on capital income and labor income, we analyze a tax reform that consists in a shift of the tax burden from capital income tax towards inheritance tax. In the standard Barro model with no time transfer and inelastic labor supply, such a policy decreases steady-state welfare. In our setting, inheritance tax modi es parent's trade-o between time transfers and bequests. We identify situations where the tax reform increases welfare for all generations. Welfare improvement mainly depends on the magnitude of the e ect of higher time transfers on the labor supply of the young.