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Inequality, Social Discounting and Estate Taxation

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  • Ivan Werning
  • Emmanuel Farhi

    ()
    (Economics Massachusetts Institute of Technology)

Abstract

To what degree should societies allow inequality to be inherited? What role should estate taxation play in shaping the intergenerational transmission of welfare? We explore these questions by modeling altruistically-linked individuals who experience privately observed taste or productivity shocks. Our positive economy is identical to models with infinite-lived individuals where efficiency requires immiseration: inequality grows without bound and everyone's consumption converges to zero. However, under an intergenerational interpretation, previous work only characterizes a particular set of Pareto-efficient allocations: those that value only the initial generation's welfare. We study other efficient allocations where the social welfare criterion values future generations directly, placing a positive weight on their welfare so that the effective social discount rate is lower than the private one. For any such difference in social and private discounting we find that consumption exhibits mean-reversion and that a steady-state, cross-sectional distribution for consumption and welfare exists, where no one is trapped at misery. The optimal allocation can then be implemented by a combination of income and estate taxation. We find that the optimal estate tax is progressive: fortunate parents face higher average marginal tax rates on their bequests.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 358.

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Date of creation: 2005
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Handle: RePEc:red:sed005:358

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  1. Narayana Kocherlakota, 2004. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 122247000000000729, UCLA Department of Economics.
  2. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  3. Andrew Caplin & John Leahy, 2001. "The social discount rate," Discussion Paper / Institute for Empirical Macroeconomics 137, Federal Reserve Bank of Minneapolis.
  4. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report 293, Federal Reserve Bank of Minneapolis.
  5. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  6. Phelan, Christopher, 1998. "On the Long Run Implications of Repeated Moral Hazard," Journal of Economic Theory, Elsevier, vol. 79(2), pages 174-191, April.
  7. Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
  8. Kaplow, Louis, 1995. "A note on subsidizing gifts," Journal of Public Economics, Elsevier, vol. 58(3), pages 469-477, November.
  9. 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.
  10. Christopher Phelan, 2005. "Opportunity and social mobility," Staff Report 323, Federal Reserve Bank of Minneapolis.
  11. Christopher Sleet, 2004. "Credible social insurance," 2004 Meeting Papers 75, Society for Economic Dynamics.
  12. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
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Cited by:
  1. Juan Carlos Cordoba & Genevieve Verdier, 2005. "Lucas vs. Lucas: On Inequality and Growth," Macroeconomics 0511021, EconWPA.
  2. Holger Strulik & Volker Grossmann, 2008. "Should Continued Family Firms Face Lower Taxes than other Estates?," CESifo Working Paper Series 2235, CESifo Group Munich.
  3. Song, Zheng Michael & Storesletten, Kjetil & Zilibotti, Fabrizio, 2012. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," CEPR Discussion Papers 8738, C.E.P.R. Discussion Papers.
  4. Yuzhe Zhang, 2005. "Dynamic contracting, persistent shocks and optimal taxation," Working Papers 640, Federal Reserve Bank of Minneapolis.
  5. Juan Carlos Cordoba & Geneviève Verdier, 2007. "Lucas vs. Lucas," IMF Working Papers 07/17, International Monetary Fund.
  6. Narayana R Kocherlakota, 2005. "Advances in Dynamic Optimal Taxation," Levine's Bibliography 784828000000000518, UCLA Department of Economics.
  7. Spataro, Luca & De Bonis, Valeria, 2008. "Accounting for the "disconnectedness" of the economy in OLG models: A case for taxing capital income," Economic Modelling, Elsevier, vol. 25(3), pages 411-421, May.
  8. Valeria DeBonis & Luca Spataro, 2006. "Social discounting, migration and optimal taxation of savings," CHILD Working Papers wp11_06, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.

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