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DP9241 | A Theory of Optimal Inheritance Taxation

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This paper derives optimal inheritance tax formulas that (a) capture the key equity-efficiency trade-off , (b) are expressed in terms of estimable sucient statistics, (c) are robust to the underlying structure of preferences. We consider dynamic stochastic models with general and heterogeneous bequest tastes and labor productivities. We limit ourselves to simple but realistic linear or two-bracket tax structures to obtain tractable formulas. We show that long-run optimal inheritance tax rates can always be expressed in terms of distributional parameters, aggregate behavioral elasticities and social preferences for redistribution. Importantly, those results carry over with tractable modi fications to (a)the case with social discounting (instead of steady-state welfare maximization), (b) the case with partly accidental bequests, (c) the standard Barro-Becker dynastic model. In all cases, the optimal inheritance tax rate increases with the concentration of bequest received and decreases with the elasticity of aggregate bequests to the net-of-tax rate. The optimal tax rate is positive and quantitatively large if concentration is high, the elasticity is low and society cares mostly about those receiving little inheritance. In contrast, the optimal tax rate is negative when society cares mostly about inheritors. We propose a calibration using micro-data for France and the United States. We find that for realistic parameters the optimal inheritance tax rate might be as large as 50%-60% - or even higher for top bequests, in line with historical experience.