Non-linear taxation of Bequest, equal sharing rules and the tradeoff between intra-and inter-family inequalities optimality

This paper studies the design of the tax and regulatory regime applied to bequests. It is based on the observation that the determination of tax rates, tax bases and sharing rules can be treated in an integrated way by considering the design of a non-linear bequest tax schedule. Families are heterogenous and differ in the parent’s wealth. Each parent has two children who differ in their income (earning ability). The tax administration observes bequests (including individual shares) but neither the parent’s wealth nor the children’s earning abilities. Parents, on the other hand, are perfectly informed about their children’s earning abilities. Parents are altruistic with their own utility depends on their children’s utility. The optimal tax schedule is shown to strike a balance between the (often) conflicting “incentive” and “corrective” effects. When parents attach identical weights to their children, a (non-linear) estate taxation (based on the sum of bequests) is sufficient. When weights differ between children, a more general (possibly non-separable) tax function, based on individual bequests, is called for. Equal sharing rules appear to be appropriate only in extreme cases such as in presence of the so-called Cinderella effect