How to Make Tax Systems Regressive

Our paper proposes a novel mechanism underlying a regressive tax system. We study tax regressivity in a two-period model with intergenerational transfers through bequests, inter vivos gifts, and trust funds.

Transfers are subject to piecewise linear tax schedules with exemptions and positive marginal rates above the allowance. Bequests and inter vivos gifts are perfect substitutes and occur late in life, while trust funds must be established early and involve a sizable fixed cost, making them accessible only to very wealthy individuals.

We show that tax regressivity can arise only for the very and super rich - those who optimally use all three transfer channels. In particular, paying the fixed cost to establish a trust fund is a necessary condition for a declining average tax rate. Regressivity then emerges if and only if any one of the tax allowances falls below a threshold that depends on preferences and marginal tax rates.

Our results highlight the central role of fixed-cost avoidance technologies in generating regressivity at the top of the wealth distribution.

Joint work with Hoang Van Khieu.

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