Inheritance Taxation with Agents Differing in Altruism

Abstract

We analyze a shift from capital income tax towards inheritance tax in a two-period overlapping generation model with rational altruism `a la Barro, where the population consists of two types of dynasties that differ in altruism. The tax reform is implemented in a way that leaves the capital-labor ratio unchanged in steady state. With inelastic labor supply, the tax reform increases welfare of the less altruistic dynasties, but decreases welfare of the most altruistic ones. We then extend the model introducing elastic labor supply and considering that the old can transfer time to their offspring in order to help them in their domestic tasks. In this context, the tax reform can enhance labor supply and increase aggregate resources for consumption of market goods. A shift from capital income tax towards inheritance tax can then be Pareto improving.