An Economic Justification for Rignano's Inheritance Tax Proposal

Families are widely recognized as crucial agents in the transmission of wealth, contributing to the perpetuation of inequality and limiting mobility across income levels. To address the economic dynamics behind this phenomenon, classical economists have explored potential solutions through government tax-transfer systems. One such proposal, advanced by Eugenio Rignano, suggests imposing higher taxes on inheritances passed down through multiple generations within a family. To analyze this idea, a model is developed that incorporates both altruistic and accidental bequests, with altruistic bequests playing a crucial role in wealth transmission. The model considers the potential disincentives that inheritance taxation might create for savings intended for altruistic bequests, as well as the benefits of taxing accidental bequests. The novelty of the model lies in its characterization of optimal inheritance taxes when there is an interaction between parents' educational decisions for their children and the transmission of wealth. Simulations suggest that adopting Rignano's proposed tax scheme enhances social welfare compared to the commonly used proportional inheritance tax. These findings suggest that Rignano's tax scheme warrants further research and policy discussion.