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Capital income taxation when inherited wealth is not observable

  • Cremer, Helmuth
  • Pestieau, Pierre
  • Rochet, Jean-Charles

This paper extends the Atkinson-Stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics: productive ability and inherited wealth. Bequests are motivated by the "joy of giving". A child's inheritance is a random variable with a probability distribution that depends on his parent's investment in a "bequest technology". Public borrowing is assumed and implies the modified golden rule. We study the optimal tax policy when two instruments are available: a non-linear (wage) income tax and a proportional tax on capital income. We show that the second instrument ought, in general, to be used but that the tax rate is not necessarily positive. However, a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 87 (2003)
Issue (Month): 11 (October)
Pages: 2475-2490

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Handle: RePEc:eee:pubeco:v:87:y:2003:i:11:p:2475-2490
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Atkinson, A B & Sandmo, A, 1980. "Welfare Implications of the Taxation of Savings," Economic Journal, Royal Economic Society, vol. 90(359), pages 529-49, September.
  2. Pirttila, Jukka & Tuomala, Matti, 2001. "On optimal non-linear taxation and public good provision in an overlapping generations economy," Journal of Public Economics, Elsevier, vol. 79(3), pages 485-501, March.
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  5. CREMER, Helmuth & PESTIEAU , Pierre & ROCHET, Jean-Charles, . "Direct versus indirect taxation: the design of the tax structure revisited," CORE Discussion Papers RP -1528, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  8. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU, Pierre, . "Redistribution with unobservable bequests: a case for taxing capital income," CORE Discussion Papers RP -1457, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  11. Pestieau, P. M., 1974. "Optimal taxation and discount rate for public investment in a growth setting," Journal of Public Economics, Elsevier, vol. 3(3), pages 217-235, August.
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  14. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
  15. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  16. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-77, June.
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