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Love thy children or money

Reflections on debt neutrality and estate taxation

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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.

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Authors and Affiliations

  1. CORE, Université de Louvain, Louvain, Belgium

    Pierre Pestieau

  2. CREPP, Université de Liège, Liège, Belgium

    Pierre Pestieau

  3. Toulouse School of Economics (GREMAQ-IDEI and Université de Perpignan), 21 allée de Brienne, 31000, Toulouse, France

    Emmanuel Thibault

Authors
  1. Pierre Pestieau
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  2. Emmanuel Thibault
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Correspondence to Emmanuel Thibault.

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We are grateful to H. d’Albis, A. d’Autume, F. Collard, H. Cremer, B. Crettez, D. de la Croix, A. Degan, F. Portier, A. Venditti and two referees for helpful suggestions and comments. We also thank the participants of seminars and conferences where earlier versions of this paper were presented.

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Pestieau, P., Thibault, E. Love thy children or money. Econ Theory 50, 31–57 (2012). https://doi.org/10.1007/s00199-010-0578-2

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