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Pareto-improving bequest taxation

  • Grossman, Volker
  • Poutvaara, Panu

Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children’s education. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high. If educational investment is partly unobservable for the government, these results qualitatively hold also when allowing for education subsidies.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20438.

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Date of creation: 2009
Date of revision:
Publication status: Published in International Tax and Public Finance 5 16(2009): pp. 647-669
Handle: RePEc:lmu:muenar:20438
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