Love thy Children or Money: Reflections on Debt Neutrality and Estate Taxation

Abstract

This paper presents a simple OLG model which is consistent with observed consumer behavior, capital accumulation and wealth distribution, and yields some new conclusions about fiscal policy. By considering a society in which individuals are distinguished according to two characteristics, altruism and wealth preference, we show that those who in the long run hold the bulk of private capital are not so much motivated by dynastic altruism as by preference for wealth. In this setting, estate taxation is a questionable instrument of redistribution: it penalizes the wealthy, but favors the top wealthy. On the other hand, even though Ricardian equivalence holds, both public debt and PAYG pensions lead to a transfer of resources from the top wealthy to the other individuals.

Reference

Pierre Pestieau, and Emmanuel Thibault, “Love thy Children or Money: Reflections on Debt Neutrality and Estate Taxation”, Economic Theory, Springer Berlin / Heidelberg, vol. 50, n. 1, 2012, pp. 31–57.