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The Vanishing Bequest Tax: The Comparative Evolution of Bequest Taxation in Historical Perspective

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  • Bertocchi, Graziella

    ()
    (University of Modena and Reggio Emilia)

Abstract

Several countries have recently abolished or significantly reduced their taxes on bequests. Bequest taxes, on the other hand, were among the first to be introduced when modern systems of taxation were developed at the end of the nineteenth century. We propose an explanation for these facts which is based on a dynamic political economy model where redistribution is determined not only by wealth inequality but also by sectoral reallocation from agriculture to manufacturing. The model shows that the dynamics of capital accumulation induce a reduction of wealth inequality, which is further accelerated by the redistributive impact of the bequest tax. Through a standard politico-economic mechanism, wealth equalization pushes toward a reduced role of the bequest tax. At the same time, however, a second mechanism is at work, with structural reallocation from agriculture to manufacturing shifting the tax base from hard-to-avoid taxes on land toward easy-to-avoid taxes on capital. The differential treatment of land and capital introduces a source of asymmetry in the tax system which interferes with the determination of the dynamic political equilibrium of the model. Its effect is to compress bequest taxation but also to delay its gradual reduction due to declining wealth inequality. A number of extensions to the basic model allow to match our theory with the long-term evolution of bequest taxation in modern democracies and with the drastic discrepancies currently observed between tax systems in developed and underdeveloped countries.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2578.

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Length: 31 pages
Date of creation: Jan 2007
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Handle: RePEc:iza:izadps:dp2578

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Keywords: structural reallocation; inequality; redistribution; voting; bequest tax;

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Cited by:
  1. Richard Bird, 2008. "Tax Challenges Facing Developing Countries," Working Papers Series, Rotman Institute for International Business, Joseph L. Rotman School of Management, University of Toronto 12, Rotman Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Mar 2008.
  2. Bas van Bavel & Ewout Frankema, 2013. "Low Income Inequality, High Wealth Inequality.The Puzzle of the Rhineland Welfare States," Working Papers, Utrecht University, Centre for Global Economic History 0050, Utrecht University, Centre for Global Economic History.
  3. Brülhart, Marius & Parchet, Raphaël, 2011. "Alleged Tax Competition: The Mysterious Death of Bequest Taxes in Switzerland," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8665, C.E.P.R. Discussion Papers.
  4. José Mª Durán Cabré & Alejandro Esteller Moré, 2007. "An empirical analysis of wealth taxation: Equity vs. tax compliance," Working Papers 2007/1, Institut d'Economia de Barcelona (IEB).
  5. Marius Brülhart & Raphaël Parchet, 2010. "Alleged Tax Competition: The Mysterious Death of InheritanceTaxes in Switzerland," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 10.04, Université de Lausanne, Faculté des HEC, DEEP.
  6. Jappelli, T. & Padula, M. & Pica, G., 2011. "GINI DP 21: Transfer Taxes and Inequality," GINI Discussion Papers, AIAS, Amsterdam Institute for Advanced Labour Studies 21, AIAS, Amsterdam Institute for Advanced Labour Studies.
  7. Wojciech Kopczuk, 2012. "Taxation of Intergenerational Transfers and Wealth," NBER Working Papers 18584, National Bureau of Economic Research, Inc.

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