Working Paper: CEPR ID: DP8946
Authors: Thomas Piketty; Emmanuel Saez
Abstract: This paper develops a realistic, tractable normative theory of socially-optimal capital taxation. We present a dynamic model of savings and bequests with heterogeneous random tastes for bequests to children and for wealth per se. We derive formulas for optimal tax rates on capitalized inheritance expressed in terms of estimable parameters and social preferences. The long-run optimal tax rate increases with the aggregate steady-state flow of inheritances to output, decreases with the elasticity of bequests to the net-of-tax rate, and decreases with the strength of preferences for leaving bequests. For realistic parameters, the optimal tax rate on capitalized inheritance should be as high as 50%-60% - or even higher for top wealth holders - if the government has meritocratic preferences (i.e., puts higher welfare weights on those receiving little inheritance) and if capital is highly concentrated (as it is in the real world). In contrast to the Atkinson-Stiglitz result, bequest taxation remains desirable in our model even with optimal labor taxation because inequality is two-dimensional: with inheritances, labor income is no longer the unique determinant of lifetime resources. In contrast to Chamley-Judd, positive capital taxation is desirable because our preferences allow for finite long run elasticities of inheritance to tax rates. Finally, we discuss how capital market imperfections and uninsurable shocks to rates of return can justify shifting one-off inheritance taxation toward lifetime capital taxation, and can account for the actual structure and mix of inheritance and capital taxation.
Keywords: optimal taxation
JEL Codes: H100
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal tax rate on capitalized inheritance (H24) | influenced by aggregate steady-state flow of inheritances to output (E10) |
| optimal tax rate on capitalized inheritance (H24) | influenced by elasticity of bequests concerning the net-of-tax rate (D15) |
| optimal tax rate on capitalized inheritance (H24) | influenced by strength of preferences for leaving bequests (D15) |
| real-world inherited wealth is highly concentrated (D31) | optimal tax rate on capitalized inheritance should be high (H24) |
| model allows for finite long-run elasticities of inheritance to tax rates (H31) | positive capital taxation is desirable (F38) |
| bequest taxation remains desirable even with optimal labor taxation (H21) | inequality is two-dimensional (C21) |
| capital market imperfections justify shift from one-off inheritance taxation to lifetime capital taxation (D15) | optimal lifetime capital tax rate can be significantly higher (H21) |
| perceptions and beliefs about wealth inequality and mobility (D31) | optimal tax policy is sensitive (H21) |
| individuals' preferred tax rates vary based on expectations regarding bequests (D15) | optimal tax policy is influenced (H21) |