Capital taxation with parental incentives

Abstract

This paper studies capital taxation in an overlapping generation model where parents regard their children as impatient. The intergenerational time-preference heterogeneity leads parents to engage in parental monetary transfers designed to encourage their children's asset accumulation (i.e., parental transfers which amount are contingent on the children's savings). In this setup, the utilitarian government's time preference is higher than that of the child generation but lower than that of the parent generation. Hence, from the government's perspective, the strategic parental transfers give too many incentives to accumulate assets. As a result, the government imposes a positive marginal tax on assets to disincentivize the younger generation's saving motives. By contrast, if parents do not have paternalistic preferences and do not make strategic parental transfers, the government imposes a zero marginal tax on assets.