Intergenerational Disagreement and Optimal Taxation of Parental Transfers

Abstract

We study optimal taxation of bequests and inter vivos transfers in a model where altruistic parents and their offspring disagree on intertemporal trade-offs. We show that the laissez-faire equilibrium is Pareto inefficient, and whenever offspring are impatient from their parents' perspective, optimal policy involves a positive tax on parental transfers. Cautioned by the technical complications present in this class of models, our normative prescriptions do not rely on the assumption of differentiability of the agents' policy functions.

Parenting With Style: Altruism and Paternalism in Intergenerational Preference Transmission

“…Other related papers in this literature include Amador, Werning, and Angeletos (2006) and Bhatt and Ogaki (2012). Pavoni and Yazici (2016) studied an optimal taxation problem where the inefficiency in decision making that arises from time-inconsistent preferences calls for a positive tax on parental transfers.…”

Optimal Paternalistic Savings Policies

“…retirement savings). Farhi andWerning (2007, 2010), Pavoni and Yazici (2016), and Phelan and Rustichini (2016) study optimal estate taxation in a model with a single level of present bias. Lockwood and Taubinsky (2017) allow for non-linear labor earnings taxes and a linear tax on the "sin good."…”

Opportunity and Inequality Across Generations

“…As shown by Findeisen and Sachs (2018) this result may not extend to human capital. Pavoni and Yazici (2017) show that children who are less patient than their parents provide a further rationale for positive taxes on It is worth noting that compared to the transition to a social optimum with immiseration, there is more social mobility and a smaller increase in inequality to maintain incentives. As discussed, for example in Kocherlakota (2010), pp.…”

“…Heathcote et al (2017), Krueger and Ludwig (2016), Lee and Seshadri (2019) and Peterman (2016) are examples for analyses based on a Ramsey approach to optimal taxation. Farhi and Werning (2010), Pavoni and Yazici (2017) and Phelan and Rustichini (2018) analyze optimal taxation of intergenerational transfers such as bequests or inheritances. The approach in our paper is to compare the status quo in the U.S., using approximations of existing tax schedules, with a social optimum that does not imply immiseration in the long run, and to analyze approximations of the social optimum with simple history-independent tax schedules.…”