What is this research about?
Since economic inequalities arise from bequests and inheritances, taxing them can help distribute wealth and equalize opportunities in society. Current research examining optimal inheritance and bequest tax policies questionably double-count the benefits of the bequests to recipients as well as to donors. The purpose of this research is to explore the outcome of bequest taxation after discounting the benefits of bequests to the donors.
What did the researchers do?
The researcher developed a mathematical model to study the optimal income taxation, inheritance taxation, and tax treatment of bequests by the government. They examine the giving from parents to their children and consider individuals who differ in their wage rates, preferences for bequests and the inheritances they receive. In addition, children may or may not have the same earning ability as their parents.
What did the researchers find?
The researchers found that:
- The absolute value of the inheritance tax and bequest tax credits are indeterminate and together determine the effective price of leaving a bequest.
- The effective price corrects social externalities, which are consequences of the government not double-counting the benefits of bequests to donors and of donors not counting the benefits of bequests to inheriting children. This effective price also helps redistribute income between donors and non-donors, as well as between inheriting and non-inheriting children.
- The optimal effective price will depend on the perceived social benefits donors receive from leaving a bequest and the proportion of donors of a given earning ability.
How can you use this research?
This research can help policymakers and researchers develop more appropriate ways to deal with inheritances in terms of their taxation.
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