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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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    References listed on IDEAS

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    1. Bas Jacobs & Dirk Schindler & Hongyan Yang, 2012. "Optimal Taxation of Risky Human Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 908-931, September.
    2. Kindermann, Fabian & Krueger, Dirk, 2014. "High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk," CEPR Discussion Papers 10208, C.E.P.R. Discussion Papers.
    3. Mikhail Golosov & Aleh Tsyvinski & Nicolas Werquin, 2014. "A Variational Approach to the Analysis of Tax Systems," NBER Working Papers 20780, National Bureau of Economic Research, Inc.
    4. Nicolas Werquin, 2016. "Income taxation with frictional labor supply," 2016 Meeting Papers 603, Society for Economic Dynamics.
    5. Katarina Nordblom & Henry Ohlsson, 2011. "Bequests, gifts, and education: links between intergenerational transfers," Empirical Economics, Springer, vol. 40(2), pages 343-358, April.
    6. Nathaniel Hendren, 2013. "The Policy Elasticity," NBER Working Papers 19177, National Bureau of Economic Research, Inc.
    7. Findeisen, Sebastian & Sachs, Dominik, 2016. "Education and optimal dynamic taxation: The role of income-contingent student loans," Journal of Public Economics, Elsevier, vol. 138(C), pages 1-21.
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    Citations

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    Cited by:

    1. Sebastian Findeisen & Dominik Sachs, 2015. "Redistribution and Insurance with Simple Tax Instruments," CESifo Working Paper Series 5400, CESifo Group Munich.
    2. Musab Kurnaz & Mehmet Soytas, 2019. "Early Childhood Investment and Income Taxation," 2019 Meeting Papers 290, Society for Economic Dynamics.
    3. Koeniger, Winfried & Zanella, Carlo, 2020. "Opportunity and Inequality across Generations," Economics Working Paper Series 2003, University of St. Gallen, School of Economics and Political Science.
    4. Findeisen, Sebastian & Sachs, Dominik, 2017. "Redistribution and insurance with simple tax instruments," Journal of Public Economics, Elsevier, vol. 146(C), pages 58-78.
    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. Colas, Mark & Findeisen, Sebastian & Sachs, Dominik, 2018. "Optimal Need-Based Financial Aid," CEPR Discussion Papers 13196, C.E.P.R. Discussion Papers.
    7. Saez, Emmanuel & Stantcheva, Stefanie, 2018. "A simpler theory of optimal capital taxation," Journal of Public Economics, Elsevier, vol. 162(C), pages 120-142.
    8. Koeniger, Winfried & Zanella, Carlo, 2020. "Opportunity and Inequality across Generations," Economics Working Paper Series 2003, University of St. Gallen, School of Economics and Political Science.
    9. Kurnaz, Musab & Soytas, Mehmet A., 2019. "Intergenerational Income Mobility and Income Taxation," GLO Discussion Paper Series 409, Global Labor Organization (GLO).

    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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