Estate taxes, consumption externalities, and altruism

Jaime Alonso-Carrera, Jordi Caballé, Xavier Raurich

Research output: Contribution to journalArticleResearchpeer-review

11 Citations (Scopus)

Abstract

We study how the introduction of consumption externalities affects the optimality of the dynamic equilibrium in an economy displaying dynastic altruism. When the bequest motive is inoperative consumption externalities affect the intertemporal margin between young and old consumption and thus modify the intertemporal path of aggregate consumption and capital. The optimal tax policy that solves this intertemporal suboptimality consists of a tax on capital income and a pay-as-you-go social security system. The latter solves the excess of capital accumulation due to the inoperativeness of the bequest motive and the former solves the suboptimal allocation of consumption due to consumption externalities. When the bequest motive is operative consumption externalities only cause an intratemporal misallocation of consumption but do not affect the optimality of the capital stock level. This suboptimal allocation of consumption implies in turn that the path of bequest deviates also from optimality. The optimal tax policy in this case consists of an estate tax and a capital income tax. © 2008 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)1751-1764
JournalJournal of Public Economics
Volume92
DOIs
Publication statusPublished - 1 Jul 2008

Keywords

  • Bequests
  • Consumption externalities
  • E13
  • E21
  • E62
  • Optimal tax rates

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