Age and health related non-linear inheritance taxation

This paper studies the design of optimal non linear bequest taxation
when individuals differ in wage, survival and probability to become dependent at
the old-age. Following the recent health and economic literature, we assume that
agents with higher wage have higher survival chances and lower risks to become
dependent. Agents make precautionary savings for their old age taking into account
the uncertainty on their health. They exhibit joy of giving utility, so that they also
set aside money for their heirs. In the absence of annuity and long term care (LTC)
insurance markets, heirs obtain different levels of bequests, depending on whether
the donor died early or late in life, and whether he was healthy at time of death.
We assume that the government does not observe the decomposition of bequests
between voluntary and involuntary ones. Instead, it observes the timing of death
and the health condition at death of the donor. We show that, under asymmetric
information, on top of marginal income taxation, the bequests left by low-income
individuals in case of early death should be taxed at the margin. To the opposite,
bequests obtained later in life need not be taxed or subsidized at the margin.