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We consider a two-period overlapping generation model with rational altruism à la Barro, where time transfers and bequests are available to parents. Starting from a steady state where public spendings are financed through taxation on saving income and labor, we analyze a tax reform that consists in a shift of the tax burden from saving income tax towards inheritance tax, leaving the capital-labor ratio unchanged. In the standard Barro model with no time transfer and inelastic labor supply, such a policy decreases steady-state welfare. We assume the young have elastic labor supply and can receive time transfers from their parents. Then inheritance tax modifies the trade-off parents make between both kinds of private transfers, and can be Pareto-improving. The Pareto improvement strongly depends on the strength of the positive effect of time transfers on the young's labor supply and on the strength of the effect of higher labor supply on the production of market goods.
