I consider optimal nonlinear taxation of income and bequests with a joy-of-giving bequest motive and explicitly characterize the optimal estate tax rate. The optimal formula trades off correction of externality from giving and discouraging effort of children due to income effect generated by bequests. The analysis shows that optimality of a positive tax on bequests rests on the strength of the effect of bequests on behavior of future generations. The analysis also suggests that inheritance, rather than estate tax, is better suited to implement the optimal policy.

Using estate tax returns data, we observe that the share of women among the very wealthy in the United States peaked in the late 1960s at nearly one-half and then declined to one-third. We argue that this pattern reflects changes in the importance of dynastic wealth, with the share of women proxying for inherited wealth. If so, wealth mobility decreased until the 1970s and rose thereafter. Such an interpretation is consistent with technological change driving long-term trends in mobility and inequality, as well as the recent divergence between top wealth and top income shares documented elsewhere.

Firms are, for the most part, absent from the modern theory of optimal taxation. Their disappearance dates from the foundational models developed by Peter A. Diamond and James A. Mirrlees (1971) in which firms are simply mechanical vehicles for combining productive inputs into output in cost-minimizing proportions. i In contrast, firms play a central role in all modern tax systems, mostly for a reason eloquently stated by Richard M. Bird (1996): “The key to effective taxation is information, and the key to information in the modern economy is the corporation. ” In most countries, firms remit the majority of tax revenues to the government, either with regard to taxes legally owed by businesses or through withholding of taxes legally owed by employees or other businesses. ii Even when businesses are not required to remit taxes, they are often required to file information reports that can facilitate monitoring of tax liabilities. The lack of a theoretical framework that features firms handcuffs rigorous welfare analysis of a number of important policy issues. One such example is the comparative evaluation of a uniform retail sales tax (RST) versus a value-added tax (VAT). In the standard model, these two taxes—both remitted entirely by businesses—are equivalent consumption

Using Danish administrative data, we estimate the impact of bequests on the level and inequality of wealth. We compare the distributions of wealth over time of people whose parent died and those whose parent did not. Bequests account for 26 percent of the average post-bequest wealth 1-3 years after parental death and significantly affect wealth throughout the distribution. Bequests increase absolute wealth inequality (variance of the distribution censored at the top/bottom 1% increases by 33 percent), but reduce relative inequality (the top 1% share declines by 6 percentage points from the base of 31 percent).