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Optimal Income, Education, and Bequest Taxes in an Intergenerational Model

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  • Stefanie Stantcheva

Abstract

This paper considers dynamic optimal income, education, and bequest taxes in a Barro-Becker dynastic setup. Parents can transfer resources to their children in two ways: First, through education investments, which have heterogeneous and stochastic returns for children, and, second, through financial bequests, which yield a safe, uniform return. Each generation’s productivity and preferences are subject to idiosyncratic shocks. I derive optimal linear formulas for each tax, as functions of estimable sufficient statistics, robust to underlying heterogeneities in preferences, and at any given level of all other taxes. It is in general not optimal to make education expenses fully tax deductible and the optimal education subsidy, income tax and bequest tax can, but need not, move together at the optimum. I also show how to derive optimal formulas using “reform-specific elasticities” that can be targeted to empirical estimates from existing reforms. I extend the model to an OLG model with altruism to study the effects of credit constraints on optimal policies. Finally, I solve for the fully unrestricted policies and show that, if education is highly complementary to children’s ability, it is optimal to distort parents’ trade-off between education and bequests and to tax education investments relative to bequests.

Suggested Citation

  • Stefanie Stantcheva, 2015. "Optimal Income, Education, and Bequest Taxes in an Intergenerational Model," NBER Working Papers 21177, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21177
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    Cited by:

    1. Stefanie Stantcheva, 2020. "Dynamic Taxation," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 801-831, August.
    2. Findeisen, Sebastian & Sachs, Dominik, 2017. "Redistribution and insurance with simple tax instruments," Journal of Public Economics, Elsevier, vol. 146(C), pages 58-78.
    3. Musab Kurnaz & Mehmet Soytas, 2019. "Early Childhood Investment and Income Taxation," 2019 Meeting Papers 290, Society for Economic Dynamics.
    4. Koeniger, Winfried & Zanella, Carlo, 2022. "Opportunity and inequality across generations," Journal of Public Economics, Elsevier, vol. 208(C).
    5. Winfried Koeniger & Julien Prat, 2018. "Human Capital and Optimal Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 1-26, January.
    6. Decerf,Benoit Marie A & Maniquet,François, 2021. "Fair Inheritance Taxation," Policy Research Working Paper Series 9804, The World Bank.
    7. Mark Colas & Sebastian Findeisen & Dominik Sachs, 2021. "Optimal Need-Based Financial Aid," Journal of Political Economy, University of Chicago Press, vol. 129(2), pages 492-533.
    8. Saez, Emmanuel & Stantcheva, Stefanie, 2018. "A simpler theory of optimal capital taxation," Journal of Public Economics, Elsevier, vol. 162(C), pages 120-142.
    9. Decerf, Benoit & Maniquet, François, 2021. "Fair inheritance taxation," LIDAM Discussion Papers CORE 2021011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    10. Kurnaz, Musab & Soytas, Mehmet A., 2019. "Intergenerational Income Mobility and Income Taxation," GLO Discussion Paper Series 409, Global Labor Organization (GLO).

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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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