Capital income taxation when inherited wealth is not observable
(2003) Journal of Public Economics — Vol. 87, n° 11, p. 2475-2490 (2003)
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- Abstract
- This paper extends the Atkinson–Stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics: productive ability and inherited wealth. Bequests are motivated by the ‘joy of giving’. A child’s inheritance is a random variable with a probability distribution that depends on his parent’s investment in a ‘bequest technology’. Public borrowing is assumed and implies the modified golden rule. We study the optimal tax policy when two instruments are available: a non-linear (wage) income tax and a proportional tax on capital income. We show that the second instrument ought, in general, to be used but that the tax rate is not necessarily positive. However, a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability.
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Cremer, H., Pestieau, P., & Rochet, J.-C. (2003). Capital income taxation when inherited wealth is not observable. Journal of Public Economics, 87(11), 2475-2490. https://hdl.handle.net/2078.5/81535 (Original work published 2003)