Optimal Bequests Taxation in the Steady State

Abstract

We consider an infinite-horizon economy populated by two types of individuals, some individuals being more productive than others. Individuals live one period and are altruistic toward their children. We first determine the second-best steady state allocation and then study the optimal bequest and labor income tax functions. We consider independent income and bequests tax functions. We first show that the second-best is not implementable with such tax schedules. We then exhibit a condition under which high bequests should be taxed (and low bequests subsidized). A numerical example suggests that this condition is likely to be met when individuals are sufficiently altruistic. Under moderate altruism, no taxation of bequests is desirable. Finally high bequests should be subsidized when individuals are poorly altruistic.