Abstract

Inherited wealth creates a second distinguishing characteristic of individuals, in addition to earning abilities. We incorporate this fact into a model of optimal labor-income taxation, with bequests motivated by joy of giving. We find that taxes on bequests or on inheritances allow further redistribution if, in the parent generation, initial wealth and earning abilities are positively related. However, these taxes distort the bequest decision and thus, the overall effect on social welfare is ambiguous. On the other hand, a tax on all expenditures of a generation (a uniform tax on consumption plus bequests) has the same redistributive effect as an inheritance tax but does not distort the bequest decision.