We consider a two-period overlapping generation model with rational altruism à la Barro, where time transfers and bequests are available to parents. Starting from a steady state where public spending is financed through taxation on capital income and labor income, we analyze a tax reform that consists in a shift of the tax burden from capital income tax toward inheritance tax. In the standard Barro model with no time transfer and inelastic labor supply, such a policy decreases steady-state welfare. In our setting, inheritance tax modifies parents’ trade-off between time transfers and bequests. We identify situations where the tax reform increases welfare for all generations. Welfare improvement mainly depends on the magnitude of the effect of higher time transfers on the labor supply of the young.
This research has been conducted as part of the project Labex MME-DII (ANR11-LBX-0023-01). We thank participants to the PET conference (July 10–13th, 2017 in Paris, France), the ASSET conference (October 27–29th, 2017 in Algiers, Algeria), the AFSE conference (May 14–16th, 2018 in Paris, France), the LAGV conference (June 25–26th, 2018 in Aix-en-Provence, France), the EEA conference (August 27–31st, 2018 in Cologne, Germany) and the CRED-Tax Economics Workshop (October 19th, 2018 in Paris, France) for their helpful comments.
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