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Implications of present-biased preferences on inheritance taxes

Published online by Cambridge University Press:  13 May 2022

Monisankar Bishnu ,
Cagri S. Kumru  and
Arm Nakornthab
Monisankar Bishnu
Affiliation:
Economics and Planning Unit, Indian Statistical Institute - Delhi Centre, 7 SJS Sansanwal Marg, New Delhi - 110016, India
Cagri S. Kumru
Affiliation:
Research School of Economics, Australian National University, Canberra, Australia, ACT, 2601
Arm Nakornthab*
Affiliation:
Faculty of Economics, Khon Kaen University, Khon Kaen, 40002, Thailand
*
*Corresponding author. Email: armeros@kku.ac.th
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Abstract

We model an economy where present biased preferences affect the bequest leaving decisions. Using Bequest in the Utility (BIU) setup, we show that the optimal inheritance tax rate under present bias can be derived in terms of estimable sufficient statistics. This optimal tax rate decreases with the level of temptation and a subsidy can be optimal at some level of bequests received. We then use the Barro-Becker Dynastic (BBD) setup to derive the expression for the optimal inheritance tax rates. We observe that if the agents internalize the taxes on the amount of bequest that they leave (sensitive generations), present bias and optimal tax rates are negatively related as in BIU, that is, providing an incentive by extending subsidies or lowering taxes is recommended to subside the effects of temptation. However, if agents ignore the taxes to be paid by their descendants on the inheritance left (ignorant generations), optimal tax rates increase with the level of present bias. This is because the present bias reduces the tax base and the rationale of providing incentives does not work anymore. Our calibration exercise supports all these theoretical findings.

Keywords

Present - biased preferencescapital and inheritance taxeswealth mobility
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 5 , July 2023 , pp. 1202 - 1229
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

†

The authors are grateful to the editor, an associate editor, and two anonymous referees for their excellent comments and suggestions. We also thank Joydeep Bhattacharya, Simon Grant, Rabee Tourky, and Thomas Piketty for their very helpful inputs. An earlier version of this paper was circulated under the title “Optimal inheritance tax under temptation”.

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