This paper studies the optimal taxes in an OLG economy with parental altruism toward children in schooling and bequests. We find that the estate tax is positive due to private income types, as parents have incentives to work less and to hide income to consume, give inter vivos, or leave bequests more. The positive estate tax is decreased by income types to grown-up children and the positive externality of bequests, but increased by the insurance over time caused by random shocks to parents’ and grown-up children’s income types. We also find that the labor income tax is positive due to the shirking effect because schooling leads to grown-up children’s heterogeneous productivity but may be negative due to private income types. Moreover, we find that the estate tax rates and the labor income tax rates are interconnected by a modified inverse Euler equation due to the insurance effect.

In infinite horizon, heterogeneous-agent and incomplete-market models, the existence of an interior Ramsey steady state is often assumed instead of proven. This paper makes two fundamental contributions: (i) We prove that the interior Ramsey steady state assumed by Aiyagari (1995) does not exist in the standard Aiyagari model. Specifically, a steady state featuring the modified golden rule and a positive capital tax is feasible but not optimal. (ii) We design a modified, analytically tractable version of the standard Aiyagari model to unveil the necessary and/or sufficient conditions for the existence of a Ramsey steady state. These conditions are shown to be quite demanding and sensitive to structural parameter values pertaining to the economy’s fiscal space for providing full self-insurance, such as the
government’s capacity to finance public debt, the degree of intertemporal elasticity of sub-itution, and the extent of history dependence of individual wealth on idiosyncratic shocks. In addition, we characterize the basic properties of both interior and non-interior Ramsey steady states and show that researchers may draw fundamentally misleading conclusions on optimal fiscal policies (such as the optimal capital tax rate) from their analysis when an interior Ramsey steady state is erroneously assumed to exist.

We consider a neoclassical growth model with quasi-hyperbolic discounting under Kantian optimization: each temporal self acts in a way that they would like every future self to act. We introduce the notion of a Kantian policy as an outcome of Kantian optimization in a given class of policies. We derive and characterize a Kantian policy in the class of policies with a constant saving rate for an economy with log-utility and Cobb–Douglas production technology and an economy with isoelastic utility and linear production technology. In all cases, the Kantian saving rate is higher than the saving rate of sophisticated agents, and a Kantian path Pareto dominates a sophisticated path.

Using US data, we study how income inequality affects intergenerational social mobility (ISM). We show that higher parental inequality reduces upward ISM at the bottom of the income distribution, but increases downward ISM at the top. We explain these results using a life-cycle model in which individuals are altruistic towards their offspring and suffer disutility of effort. Investment in education and effort increase earnings. This model introduces two mechanisms that explain the different effects of inequality on ISM. First, borrowing constraints limit investment in education and reduce future income of children born in poor families, which explains that higher income inequality reduces upward ISM at the bottom of the distribution. Second, due to the disutility of effort, children from affluent families exert less effort, which explains that higher income inequality increases downward ISM at the top of the distribution. We use the model to study the effect of higher income inequality on future aggregate income.