Bequest Motives and the Demand for Life Insurance in East Germany

Empirical studies of household saving remain inconclusive about the role of bequest motives. This may be due to the diluting effect of different tax regimes across countries and time on estimates of bequest motives. Relative to market‐based economies, the former German Democratic Republic can be viewed as an experimental institutional setting where life‐insurance demand was not influenced by tax considerations. This allows isolating bequest motives from other life‐cycle and precautionary savings motives. Analyzing the demand for life insurance, we find a significantly higher ownership probability among households with children and a high regard for the family, confirming bequest motives in life‐insurance demand.     

Voting over selfishly optimal tax schedules: Can Pigouvian tax redistribute income?

This paper studies pairwise majority voting over selfishly optimal nonlinear income tax schedules proposed by a continuum of individuals who differ in privately observable skills and make consumption comparisons, which creates a negative positional externality. It shows that the tax schedule preferred by the median skill type will win the voting contest. Given a reference consumption defined as the average consumption in the population, all skills face the same Pigouvian tax rate in the utilitarian optimum, whereas in selfish optima high skills face a Pigouvian tax rate larger than that facing low skills, generating a novel income redistributive effect. Under a constant elasticity of labor supply, two more results are obtained. First, for Pareto, Champernowne, Weibull, and lognormal skill distributions, the selfishly optimal tax schedule facing high (low) skills tends to be more progressive when the bottom‐skill's (top‐skill's) status concern intensifies. Second, it identifies the conditions under which, in the voting equilibrium, high skills face higher marginal tax rates while low skills face lower ones than what they face in the utilitarian optimum.     

An optional tax system

The model is of choice of hours worked and net of tax income by workers who vary in their skill levels. All workers face the same initial linear income tax schedule. We construct a set of linear income tax schedules, differeing in their degree of progressivity, and then allow each worker to choose under which schedule he shall be taxed. No worker is worse off under the option, and no worker pays less tax. Most workers are better off, and pay more tax. Hence, the optional tax system Pareto dominates the initial tax system.     

Capital income taxation when inherited wealth is not observable

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.     

Fiscal Policy in an Overlapping Generations Model with Bequest-as-Consumption

This paper analyzes an overlapping generation (OLG) growth model wherein saving finances second period consumption and bequest‐as‐consumption. First, it looks at the market equilibrium and at the optimal solution; then it turns to the issue of decentralizing the optimal solution with various taxes and transfers. Depending on the available instruments, either a first‐best or a second‐best optimum can be achieved. Throughout the paper, the results are contrasted with those obtained in the standard OLG model without intergenerational transfers.     

THE VANISHING BEQUEST TAX: THE COMPARATIVE EVOLUTION OF BEQUEST TAXATION IN HISTORICAL PERSPECTIVE

Bequest tax revenues have been declining in OECD countries for at least 70 years. We propose an explanation that is based on a dynamic politico‐economic model where the evolution of bequest taxation is determined by wealth inequality. Since economic development induces a growing role of labor income and thus a reduction of wealth inequality, bequest taxation is reduced over time. The model also embeds a process of structural reallocation from agriculture to manufacturing and a consequent shift of the tax base from easy‐to‐tax land to hard‐to‐tax capital. This process implies a lower tax level and slower equalization‐induced tax reduction, the higher is the tax avoidance rate and the less developed is the economy. The introduction of franchise restrictions which are gradually lifted over time allows the hump‐shaped long‐term evolution of bequest taxation to be reproduced starting from the nineteenth century for those countries that are now modern industrial democracies. The evolution of political institutions also helps to explain the discrepancies currently observed between tax systems in developed and underdeveloped countries.     

Should the Good and the Selfish be Taxed Differently?*

In this paper, we consider an environment where individual actions have externalities and two types of agents exist: agents with social preferences (the good) and selfish agents. Selfish agents have pay‐off functions that do not take into account social welfare. The pay‐off of an agent is a linear combination of social welfare and the pay‐off of a selfish agent. We demonstrate that the corrective tax rates that maximize social welfare do not depend on the degree of social preferences. Hence, the good and the selfish should not be taxed differently.     

Taxation, Bequests, and Short and Long Run Timber Supplies: An Overlapping Generations Problem

This paper uses an overlapping generations model with one-sided altruism to study the effects of several forest taxes that target bequests and affect timber supply. Unlike previous work, we investigate bequests and timber supply in both the short and long run when bequests are costly (e.g., taxed). The landowner's problem is examined in the short run, while the government's problem is examined in the long run assuming the existence of a steady state. We also consider taxes targeting harvests, growth, savings and bequests. Several new results are established concerning the interactions of taxes that might be used by a government to alter short and long run forest capital stocks: (i) the presence of a forest bequest tax affects the neutrality of harvest tax in both the short and long run, (ii) in the long run the bequest tax decreases bequests and timber supplies. When the bequest tax is not present, the capital income tax is neutral with respect to bequest and timber supply, while the harvest tax is neutral only if forest productivity is also not taxed. Finally, (iii) in the short run, the substitution and total effects of taxes in landowner decisions generally depend on the presence of the bequest tax. The results have implications for Pigouvian tax design and second best tax choice.     

Optimal Income Taxation and Job Choice

In this paper, we study optimal income taxation when different job types exist for workers of different skills. Each job type has some feasible range of incomes from which workers choose by varying labor supply. Workers are more productive than others in the jobs that suit them best. The model combines features of the classic optimal tax literature with labor variability along the intensive margin, with the extensive‐margin approach where workers make discrete job choices and/or participation decisions. We find that first‐best maximin utility can be achieved in the second‐best, and marginal tax rates below the top can be negative or zero.     

Sustainable Forestry: Timber Bequests, Future Generations and Optimal Tax Policy

This paper analyzes harvesting and timber bequest behavior in a two-period overlapping generations model where the government uses site productivity, yield and inheritance taxation. The ceteris paribus effects of forest and inheritance taxes are derived first, then the paper discusses the optimal design of forest and inheritance taxes by assuming that intergenerational externalities are either absent or operative. In the absence of intergenerational externalities, it is optimal to use only the site productivity tax, and not to introduce yield and inheritance taxes at all. In the presence of intergenerational externalities the situation changes. The paper demonstrates that the externality can be internalized by introducing either a yield tax or an inheritance subsidy, or both. If the government is able to use both at the same time, it is desirable to use the yield tax to 'punish' excessive harvesting and an inheritance subsidy to 'bribe' to give bequests.     

Optimal Protection of Property Rights in a General Equilibrium Model of Growth*

We incorporate weak property rights into an otherwise standard general equilibrium model of growth and second‐best optimal policy. In this setup, the state plays two of its key roles: it protects property rights and provides public services. The government chooses policy (the income tax rate, as well as the allocation of collected tax revenues between law enforcement and public services) to maximize the growth rate of the economy. The focus of our analysis is on how weak property rights generate multiple decentralized competitive equilibria, the different properties of these equilibria, and the implications of second‐best optimal policies.     

Do budget maximizing public officials increase the probability of property reassessment?

County governments in Pennsylvania face non‐binding limits on their property tax rates. These are considered non‐binding because they do not place a limit on tax levies or expenditures. Assuming local public officials have monopoly power, tax rate limits can be circumvented by reassessing the property tax base. A two‐stage process was hypothesized in which the probability of reaching tax rate limits first was determined and the probability of reassessment then was determined. The effect of budget maximizing government officials at each stage was tested for 66 Pennsylvania counties over the 1970–1995 period. The empirical results showed that variables associated with budget maximizing behaviour influenced the choice in each stage. Public expenditure growth increased the probability of reaching the tax rate limit in the first stage while reaching the tax rate limit increased the probability of reassessment in the second stage. The estimates also showed that economic, fiscal and taste variables were significant determinants of these probabilities.     

Optimal Nonlinear Income Taxation with Habit Formation

It has recently been shown that incorporating “keeping up with the Joneses” preferences into a prototypical two‐ability‐type optimal nonlinear income tax model leads to higher marginal tax rates for both types of agents. In particular, the high‐skill type faces a positive marginal tax rate, rather than zero as in the conventional case. In this paper, agents’ utility functions are postulated to exhibit “habit formation in consumption” such that the prototypical two‐ability‐type optimal nonlinear income tax model becomes a dynamic analytical framework. We show that if the government can commit to its future fiscal policy, the presence of consumption habits does not affect the standard results on optimal marginal tax rates. By contrast, if the government cannot precommit, the high‐skill type will face a negative marginal tax rate, while the low‐skill type’s marginal tax rate remains positive.     

Ramsey,Pigou, Heterogeneous Agents,and Nonatmospheric Consumption Externalities

This paper analyzes the effects of nonatmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second‐best level of public good provision to exceed the first‐best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, the second‐best commodity tax rate may fall short of the first‐best rate. Moreover, in this case, heterogeneity may imply an equity‐efficiency tradeoff. This tradeoff is present only if the consumption externality is of the nonatmospheric type.     

Optimal Age-Specific Income Taxation

This paper studies optimal earnings taxation in a three‐period life‐cycle model where taxes can be differentiated according to age. Agents choose their level of education when young and their retirement age when old. I study the problem both without and with borrowing constraints. It is shown that, without borrowing constraints, a first‐best optimum can be decentralized by setting a zero tax rate in the third period and a first‐period tax lower than the second‐period one. With borrowing constraints, the first best can no longer be achieved. The gap between the first‐ and second‐period tax rates is larger, while the third‐period tax rate is generally different from zero.     

Strategies for Fiscal Reform in the Context of the EMU: the Case of Portugal

The authors use an endogenous growth dynamic general‐equilibrium model, which accommodates the institutional constraints of the Stability and Growth Pact, to study tax reform in Portugal. Simulation results suggest that tax cuts financed in a nondistortionary way increase long‐term GDP; i.e., they are efficiency improving, but do not always increase welfare. The tradeoff between efficiency and welfare is alleviated when reductions in public spending or increased public indebtedness finance the tax cuts. Since these mechanisms are not realistic under the institutional setting of the Stability and Growth Pact, tax reform in Portugal must involve trading off distortionary tax margins. In this case, the best strategy to increase both efficiency and welfare is to increase investment tax credits and finance them either through personal income taxes or through employers’ social security contributions.     

Redistribution and Provision of Public Goods in an Economic Federation

This paper concerns redistribution and public good provision in an economic federation with two levels of government: a local government in each locality and a (first mover) central government. Each locality is characterized by two ability‐types, and the ability‐distribution differs across localities. The central government redistributes via a nonlinear income tax and a lump‐sum transfer to each local government, while the local governments use proportional income taxes and provide local public goods. We show how the redistributive role of taxation is combined with a corrective role, and how the central government can implement the second best resource allocation.     

Is the household demand for in-home services sensitive to tax reductions? The French case

Our paper examines the impact of tax reductions on the demand for services in the home. For that purpose, we estimate a structural model of demand for such services by using household individual data collected by INSEE (Paris) in 1996. In this model, the net hourly wage paid to the domestic employee, the household preferences for consumption of in-home services and the decision to take advantage of the tax reduction are considered as endogenous variables. Estimation of the econometric model uses the fact that some households are observed to consume domestic services and to take advantage of the tax reduction, while others either consume such services but do not take advantage of the tax reduction, or do not consume these services at all. Its identification relies on an exclusion restriction resulting from the tax credit schedule. Results show that the probability of consuming in-home services increases with age and income. A 10% increase in the tax reduction would increase from 45.9 to 50.8% the proportion of households benefiting from the tax reduction among those who consume paid in-home services. Moreover, 13.5% of households who do not actually consume such services would do so after the 10% increase in the tax reduction. These simulated variations would mainly concern high-income households.     

Bequest Motives and the Annuity Puzzle

Few retirees annuitize any wealth, a fact that has so far defied explanation within the standard framework of forward-looking, expected utility-maximizing agents. Bequest motives seem a natural explanation. Yet the prevailing view is that people with plausible bequest motives should annuitize part of their wealth, and thus that bequest motives cannot explain why most people do not annuitize any wealth. I show, however, that people with plausible bequest motives are likely to be better off not annuitizing any wealth at available rates. The evidence suggests that bequest motives play a central role in limiting the demand for annuities.     

On the Optimal Taxation in a Growth Model of the Mixed Economy

Previous studies of second‐best taxation have shown that capital income shall not be taxed in the long run for some cases where individuals have infinite lives and a utility function of special form. The present paper improves upon this conclusion in two respects: first, the utility function may be of more general form, and second, zero capital income tax is required for the entire period, which does not depend on whether the individual's horizon is infinite or finite. Furthermore, we also show that the optimal tax rate on capital income should tend to zero in the long run if the first‐best optimum is attainable.