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How Do Income and Bequest Taxes Affect Income Inequality? The Role of Parental Transfers

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Abstract

This paper studies how income and bequest taxes affect income inequality. We firstly explore this relationship empirically using a panel of 20 OECD countries from 1980 to 2008. The data shows that an increase of income taxation tends to strengthen income inequality, while the inequality effect of bequest taxation is ambiguous. In order to explain these findings, we develop an overlapping generation model with inter-generational transfers. Altruistic parents face thejoint decision of making educational investment and leaving financial bequests. A change in tax structure will affect both asset allocation decision and wealth transmission, which in turn governs the dynamics of human capital accumulation and determines the net tax effects on equilibrium income distribution. We show these tax effects on income inequality analytically, and examine aggregate effects with numerical experiments. We find that the predictions of our model are consistent with data patterns.

Suggested Citation

  • Chih-Chin Ho & Ching-Yang Lin & Cheng-Tao Tang, 2013. "How Do Income and Bequest Taxes Affect Income Inequality? The Role of Parental Transfers," Working Papers EMS_2013_10, Research Institute, International University of Japan.
    • Handle: RePEc:iuj:wpaper:ems_2013_10
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    More about this item

    Keywords

    Tax structure; Human capital; Bequests; Income inequality; Intergenerational transfers;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • I24 - Health, Education, and Welfare - - Education - - - Education and Inequality

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