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Tax treatment of bequests when donor benefits are discounted

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  • Robin Boadway
  • Katherine Cuff

Abstract

Recent literature on bequest taxation has made a case for subsidizing bequests on efficiency grounds, with the rate of subsidy declining with the size of the bequest to equalize opportunities among inheritors. These results rely heavily on the fact that bequests benefit both the donor and the recipient, creating an externality that is not taken into account by donors. The double counting of the benefits of bequests is questionable on normative grounds. We study the consequences for bequest taxation of giving less than full social weight to the benefit to donors. We analyse a simple model of parents and children with different skills where parents differ in their preferences for bequests. The government implements nonlinear income taxes on both parents and children as well as a linear inheritance tax and gives differential linear bequest tax credits to donor parents based on income. The nonlinear income taxes take standard forms. The inheritance tax and bequest tax credits are of indeterminate absolute level and together determine the effective price of net bequests. This effective price plays both externality-correcting and redistributive roles. The optimal effective price will depend on the social weight given to donor benefits and the share of donors of a given skill type. Copyright Springer Science+Business Media New York 2015

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  • Robin Boadway & Katherine Cuff, 2015. "Tax treatment of bequests when donor benefits are discounted," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 604-634, August.
    • Handle: RePEc:kap:itaxpf:v:22:y:2015:i:4:p:604-634
    DOI: 10.1007/s10797-015-9366-z
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    References listed on IDEAS

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    Cited by:

    1. Bastani, Spencer & Waldenström, Daniel, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," IZA Discussion Papers 11475, Institute of Labor Economics (IZA).
    2. Janusz Kud³a & Robert Kruszewski & Maciej Dudek & Konrad Walczyk, 2023. "The impact of bequest taxation on savings and transfers," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(2), pages 333-365, June.
    3. Spencer Bastani & Daniel Waldenström, 2020. "How Should Capital Be Taxed?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 812-846, September.
    4. Spencer Bastani & Daniel Waldenström, 2018. "How should capital be taxed? The Swedish experience," World Inequality Lab Working Papers hal-02878153, HAL.
    5. Boadway,Robin & Cuff,Katherine, 2022. "Tax Policy," Cambridge Books, Cambridge University Press, number 9781108949453, January.
    6. Zarko Kalamov & Marco Runkel, 2020. "Taxes on unhealthy food and externalities in the parental choice of children's diet," Health Economics, John Wiley & Sons, Ltd., vol. 29(8), pages 938-944, August.
    7. Philipp Krug, 2022. "Optimal Estate Taxation: More (about) Heterogeneity across Dynasties," Working Papers 217, Bavarian Graduate Program in Economics (BGPE).

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    More about this item

    Keywords

    Bequest tax; Inheritance; Optimal income tax; H21; H23; H24;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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