Optimal Estate Taxation in the Steady State
Abstract:
The optimal income taxation problem is extended to analyze estate taxation. In the model, people have preferences over bequest, consumption and leisure, with a potential external aspect of bequests. The optimization is subject to the steady state constraint on the distribution of bequests, under a simplifying assumption of perfect correlation of abilities within family lines. The optimal taxes have a modular structure, with components re ecting redistribution, Pigouvian correction of bequest externality, and linear contributions due to pecuniary externalities acting through factor prices. Without a bequest externality, estate taxation is governed by commodity tax rules and in a special case it is not necessary. When the external effect is present, inheritance becomes a (partially) exogenous source of inequality and it should be treated analogously to the regular income implying that estate taxation is useful for redistribution. This effect is separate from the Pigouvian correction. I also demonstrate that the Atkinson-Stiglitz commodity taxation logic applies in the steady state even if it implies saving distortions. This result is related to the “no capital taxation” propositions known from the literature.