Fair Inheritance Taxation

This paper studies the optimal taxation of bequests in a model in which individuals have heterogeneous preferences over their consumption and the net-of-tax bequest received by their heir. The bequest left by an individual depends on both her degree of altruism and the bequest received from her parents. First, the paper studies two principles that are at the heart of the debates on taxing inheritances: (1) children should not be penalized by the lack of altruism of their parents, and (2) parents should be free to choose their bequests. Only one social welfare function satisfies these two principles, together with Pareto efficiency and a separability principle. Second, the paper studies the shape of the inheritance tax scheme that maximizes this social welfare function. It shows that in the aggregate, the inheritance tax must collect money (redistributed through a non-negative demogrant). Moreover, small bequests cannot be taxed (they can potentially be subsidized), while bequests that are larger than those of the most altruistic individuals who did not receive bequests from their parents should be taxed as much as efficiency permits.