Altruism, incomplete markets, and tax reform

Abstract

We compute the welfare e¤ects of di¤erent revenue-neutral tax reforms that eliminate capital income taxation in a general equilibrium model calibrated to the U.S. economy. We …nd that the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%. In our calibrated dynastic economy, 75% of the population alive at the time of the reform bene…t from it. Altruism plays an important role in this result. Individuals use intervivos transfers and bequests to redistribute the long-run bene…ts in the form of higher after-tax wages and interest rates that will bene…t future generations toward the current generations. Indeed, in a pure life-cycle economy calibrated to the same U.S. observations, we …nd that the same reform would bene…t only 9% of the population. The increase in the consumption tax at the initial period of the transition hurts all individuals except for the very young workers. Since generations are not linked by private transfers, the e¢ -ciency gains of this reform are only enjoyed by generations born in the very far future. A popular tax reform in the pure life-cycle model is one that bene…ts current generations regardless of the impact on future generations. For instance, the elimination of capital income taxation …nanced with an increase in the wage tax bene…ts 63% of the population living at the time of the reform but decreases welfare in the long-run. Abstract

Costly Financial Intermediation in Neoclassical Growth Theory

“…While a casual consideration of bequests naturally assumes that they exist because of parents' altruistic concern for the economic well-being of their offspring, results in Menchik and David (1983), Hurd (1989), Wilhelm (1996), Laitner and Juster (1996), Altonji, Hayashi, and Kotlikoff (1997), Laitner and Ohlsson (2001), Kopczuk and Lupton (2007), and Fuster, Imrohoroglu, and Imrohoroglu (2008) suggest otherwise: households with children do not, in general, exhibit behavior in greater accord with a bequest motive than do childless households. This, we think, leads us to conclude that the existing literature supports our assumption that some people have preferences for making bequests.…”

Beggar-Thy-Parents? A Lifecycle Model of Intergenerational Altruism

“…This paper adds to the rich empirical literature on market imperfection and intergenerational transfers started out with Bruce and Waldman (1990) [9] and Altig and Davis (1992) [3], among others. In terms of the model set-up, this paper is closest to the work done by Fuster, Imrohoroglu, and Imrohoroglu (2008) [14], which looks at the welfare effects of revenue-neutral tax reforms calibrated to the United States economy for a dynastic and a pure life-cycle economy framework. However, this paper distinguishes itself in two different aspects: First, the two extreme set-ups proposed by Fuster, Imrohoroglu, and Imrohoroglu (2008) [14] are unclear about matching the age-wealth profile or the overall distribution of wealth in the data.…”

“…In terms of the model set-up, this paper is closest to the work done by Fuster, Imrohoroglu, and Imrohoroglu (2008) [14], which looks at the welfare effects of revenue-neutral tax reforms calibrated to the United States economy for a dynastic and a pure life-cycle economy framework. However, this paper distinguishes itself in two different aspects: First, the two extreme set-ups proposed by Fuster, Imrohoroglu, and Imrohoroglu (2008) [14] are unclear about matching the age-wealth profile or the overall distribution of wealth in the data. This paper proposes a single model featuring both dynastic and life-cycle aspects with the family as a tool for insurance and explicitly documents the age-wealth profile and the overall distribution of wealth.…”

“…This paper proposes a single model featuring both dynastic and life-cycle aspects with the family as a tool for insurance and explicitly documents the age-wealth profile and the overall distribution of wealth. Second, as pointed out byÁbráham (2008) [1] , there is no borrowing in the model specification of Fuster, Imrohoroglu, and Imrohoroglu [14], which may limit the implications of intergenerational transfers and welfare. This paper, on the other hand, endogenizes borrowing constraint into the model by incorporating the notion that children can borrow against their current income but also the asset of their parents as partial collateral, which is empirically more plausible.…”

Inequality and the marriage gap

“…De Nardi (2004) shows that intentional bequests can explain the emergence of very large estates and, therefore, help to generate a high degree of concentration at the upper tail of the wealth distribution. Fuster et al (2008) study the significance of intergenerational links for the impact of various tax reform proposals. They confront two polar frameworks: a pure life-cycle model, on the one hand, and a dynastic model with altruistic links, on the other hand.…”