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Estate Taxes, Consumption Externalities, and Altruism

Listed author(s):
  • Jaime Alonso-Carrera
  • Jordi Caballé
  • Xavier Raurich

We study how the introduction of consumption externalities affects the efficiency of the dynamic equilibrium in an economy displaying dynastic altruism. When the bequest motive is inoperative consumption externalities affect the intertemporal margin between young and old consumption and thus modify the intertemporal path of consumption and capital. The optimal tax policy that solves this intertemporal inefficiency consists of a tax on capital income and a pay-as-you-go social security system. The later solves the overaccumulation of capital due to the inoperativeness of the bequest motive and the former solves the inefficient allocation of consumption due to consumption externalities. When the bequest motive is operative consumption externalities only cause an intratemporal inefficiency that affects the allocation of consumption between the generations living in the same period but do not affect the optimality of the capital stock level. This suboptimal allocation of consumption implies in turn that the path of bequest is also suboptimal. The optimal tax policy in this case consists of an estate tax and a capital income tax. The estate tax corrects the intratemporal inefficiency but generates an intertemporal inefficiency which is corrected by means of an appropriate capital income tax.

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File URL: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/232.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 232.

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Date of creation: Nov 2005
Handle: RePEc:bge:wpaper:232
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  1. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2007. "Aspirations, Habit Formation, and Bequest Motive," Economic Journal, Royal Economic Society, vol. 117(520), pages 813-836, 04.
  2. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, vol. 49(6), pages 1665-1691, August.
  3. Turnovsky, Stephen J. & Monteiro, Goncalo, 2007. "Consumption externalities, production externalities, and efficient capital accumulation under time non-separable preferences," European Economic Review, Elsevier, vol. 51(2), pages 479-504, February.
  4. Croix, David de la & Michel, Philippe, 1999. "Optimal growth when tastes are inherited," Journal of Economic Dynamics and Control, Elsevier, vol. 23(4), pages 519-537, February.
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  6. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Consumption Externalities, Habit Formation and Equilibrium Efficiency," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 231-251, 06.
  7. Abel, Andrew B, 1987. "Operative Gift and Bequest Motives," American Economic Review, American Economic Association, vol. 77(5), pages 1037-1047, December.
  8. Lahiri, Amartya & Puhakka, Mikko, 1998. "Habit Persistence in Overlapping Generations Economies under Pure Exchange," Journal of Economic Theory, Elsevier, vol. 78(1), pages 176-186, January.
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  10. de la Croix, David, 1996. "The dynamics of bequeathed tastes," Economics Letters, Elsevier, vol. 53(1), pages 89-96, October.
  11. Emmanuel Thibault, 2000. "Existence of equilibrium in an OLG model with production and altruistic preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(3), pages 709-715.
  12. Ronald Wendner, 2002. "Capital Accumulation and Habit Formation," Economics Bulletin, AccessEcon, vol. 4(7), pages 1-10.
  13. Abel, Andrew B, 1986. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," Econometrica, Econometric Society, vol. 54(5), pages 1079-1097, September.
  14. de la Croix, David & Michel, Philippe, 1997. "Altruism and self-refrain," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1998010, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Apr 1998.
  15. John Laitner, 1988. "Bequests, Gifts, and Social Security," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 275-299.
  16. Walter Fisher & Franz Hof, 2000. "Relative consumption, economic growth, and taxation," Journal of Economics, Springer, vol. 72(3), pages 241-262, October.
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  18. repec:ebl:ecbull:v:4:y:2002:i:7:p:1-10 is not listed on IDEAS
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  20. Weil, Philippe, 1987. "Love thy children : Reflections on the Barro debt neutrality theorem," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 377-391, May.
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