Intergenerational Transfers in a Tractable Overlapping- Generations Setting

Motivated by the Generation-Skipping Transfer Tax (GSTT) in the United States, we examine how varying estate tax rates by the heir’s age affects welfare. Methodologically, we introduce a parsimonious constant elasticity of substitution (CES) bequest utility that is markedly more tractable than the altruistic specifications commonly used in the literature, delivering closed-form optimal rules and transparent parameterization. Using this new framework, we provide a proof of concept showing how transfers from older to younger generations can enhance equilibrium welfare in a dynamically efficient economy à la Samuelson (1975). We embed the tractable bequest utility in a two-period overlapping-generations model with age-dependent estate tax schedules. Numerical exercises—parameterized to the fact that estate tax revenue is small relative to labor income taxation—indicate that lowering the tax rate on bequests to younger heirs (grandchildren) relative to older heirs (adult children) raises the present value of lifetime resources and overall welfare, effectively reversing the logic of the current GSTT. The findings highlight a practical avenue for implementing a “reverse social security” transfer from old to young that can improve welfare in dynamically efficient economies.