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The Crucial Role of Social Welfare Criteria and Individual Heterogeneity for Optimal Inheritance Taxation

  • Esteban García-Miralles ORCID logo EMAIL logo
Published/Copyright: January 29, 2020
The B.E. Journal of Economic Analysis & Policy
From the journal The B.E. Journal of Economic Analysis & Policy Volume 20 Issue 2

Abstract

This paper extends the calibrations of Piketty and Saez (2013. “A Theory of Optimal Inheritance Taxation.” Econometrica 81 (5): 1851–86) to unveil the importance of the assumed social welfare criteria and its interplay with individual heterogeneity on optimal inheritance taxation. I calibrate the full social optimal tax rate and find that it is highly sensitive to the assumed social welfare criteria. The optimal tax rate ranges from negative (under a utilitarian criterion) to positive and large (even assuming joy of giving motives). A decreasing marginal utility of consumption does not affect the results qualitatively, given the underlying distribution of wealth and income. I also calibrate the optimal tax rate by percentile of the distribution of bequest received, as in Piketty and Saez, but accounting for heterogeneity in wealth and labor income. This leads to significant variation in the optimal tax rate among zero-bequest receivers, contrary to their finding of a constant tax rate.

Keywords: optimal inheritance taxation; social welfare function; wealth inequality
JEL Classification: H21; H23; D31; D63

Acknowledgements

I would like to thank Claus T. Kreiner for his guidance and insightful discussions. This work also benefited from the advice kindly provided by Bertrand Garbinti for the replication analysis. I also thank Pol Campos, José María Casado, Laura Crespo, Miriam Gensowski, Mette Gørtz, Essi Kujansuu, José María Labeaga, Lourdes Moreno, Jorge Onrubia, Roberto Ramos, Ernesto Villanueva, and seminar participants at Banco de España, at the 43rd Symposium of the Spanish Economic Association (SAEe, Madrid), at the XX Applied Economics Meeting (Valencia), and at the XXIV Encuentro de Economía Pública (Toledo) for useful comments and suggestions. I gratefully acknowledge financial support from Fundación Ramón Areces. The activities of CEBI are financed by a grant from the Danish National Research Foundation. Grant number #DNRF134.

A Appendix

Figure 4: Social welfare weights for each individual under different SWF and concavities of the individual utility function. Under a Rawlsian criterion the welfare weights are independent of the individual utility assumed. Figures are truncated at 0.005 and 200,000.
Figure 4: Social welfare weights for each individual under different SWF and concavities of the individual utility function. Under a Rawlsian criterion the welfare weights are independent of the individual utility assumed. Figures are truncated at 0.005 and 200,000.
Figure 4: Social welfare weights for each individual under different SWF and concavities of the individual utility function. Under a Rawlsian criterion the welfare weights are independent of the individual utility assumed. Figures are truncated at 0.005 and 200,000.
Figure 4:

Social welfare weights for each individual under different SWF and concavities of the individual utility function. Under a Rawlsian criterion the welfare weights are independent of the individual utility assumed. Figures are truncated at 0.005 and 200,000.

Figure 5: Optimal tax and distributional parameter subordering by total budget (inheritance received + labor income).
Figure 5: Optimal tax and distributional parameter subordering by total budget (inheritance received + labor income).
Figure 5:

Optimal tax and distributional parameter subordering by total budget (inheritance received + labor income).

Figure 6: Optimal tax and distributional parameter subordering by total budget extended (inheritance received + labor income + wealth).
Figure 6: Optimal tax and distributional parameter subordering by total budget extended (inheritance received + labor income + wealth).
Figure 6:

Optimal tax and distributional parameter subordering by total budget extended (inheritance received + labor income + wealth).

References

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Published Online: 2020-01-29

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https://doi.org/10.1515/bejeap-2019-0274
Keywords for this article
optimal inheritance taxation; social welfare function; wealth inequality

Articles in the same Issue

  1. Research-Articles
  2. The Wage Response to a Reduction in Income Tax Rates: The Israeli Tax Reform
  3. Employee Choice and the Demand for Health Insurance Coverage: Evidence from Random Coefficients Models
  4. Marathon, Hurdling, or Sprint? The Effects of Exam Scheduling on Academic Performance
  5. Sharing Competition: An Agent-Based Model for the Short-Term Accommodations Market
  6. Timing of Adopting a Flexible Manufacturing System and Product Differentiation
  7. Childcare Allowances and Public Pensions: Welfare and Demographic Effects in an Aging Japan
  8. The Crucial Role of Social Welfare Criteria and Individual Heterogeneity for Optimal Inheritance Taxation
  9. The Economics of Enlightenment: Time Value of Knowledge and the Net Present Value (NPV) of Knowledge Machines, A Proposed Approach Adapted from Finance
  10. The Consequences of the 1959–1961 Chinese Famine for Educational Attainment
  11. Investment in Green Technology and Entry Deterrence
  12. Analyzing the Effect of Mandatory Water Restrictions on Water Usage
  13. Acquisitions for Sleep
  14. Gender Differences in Performance and Risk-taking among Children, Teenagers, and College Students: Evidence from Jeopardy!
  15. Letters
  16. Accounting for Differences in Female Labor Force Participation between China and India
  17. Conflict Intensity and Birth Outcomes – Evidence from the West Bank
  18. Search and Bidding Costs
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