Capital income taxation when inherited wealth is not observable |
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Authors: | Helmuth CremerJean-Charles Rochet |
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Affiliation: | a University of Toulouse, IDEI and GREMAQ, Place Anatole France, F-31042 Toulouse, France b CREPP, University of Liège, CORE and Delta, Liege, France c University of Toulouse, IDEI and GREMAQ, Toulouse, France |
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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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Keywords: | Capital income taxation Inherited wealth altruism |
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