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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. Ulrike Vogelgesang & Ulrike Ludden, 1999. "Optimal Capital Income Taxation and Redistribution," GK working paper series 1999-10, Post Graduate Programme "Allocation on Financial Markets", University of Mannheim, revised Apr 2000.
  2. Boadway, R. & Marchand, M. & Pestieau, P., . "Towards a theory of the direct-indirect tax mix," CORE Discussion Papers RP -1110, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  4. GEVERS, Louis & MICHEL, Philippe, 1998. "Economic dynasties with intermissions," CORE Discussion Papers 1998012, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. 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.
  6. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 2000. " Redistribution with Unobservable Bequests: A Case for Taxing Capital Income," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(2), pages 253-67, June.
  7. 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.
  8. 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.
  9. Cremer, Helmuth & Gahvari, Firouz, 1995. "Uncertainty, Optimal Taxation and the Direct versus Indirect Tax Controversy," Economic Journal, Royal Economic Society, vol. 105(432), pages 1165-79, September.
  10. 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.
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