Optimum Taxation Of Inheritances

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Executive Summary

Inheritances create a second distinguishing characteristic of individuals, in addition to earning abilities. The authors incorporate this fact into an optimum income taxation model with bequests motivated by joy of giving, and show that a tax on inherited wealth is equivalent to a uniform tax on consumption plus bequests. These taxes are desirable according to an intertemporal social objective if, on average, high-able individuals inherit more wealth than low-able. They demonstrate that such a situation results as the outcome of a process with stochastic transition of abilities over generations, if all descendants are more probable to have their parent's ability rank than any other.

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