Working Paper, Department of Economics, Johannes Kepler University of Linz 1204
I study a model of a representative individual who has a motive for leaving bequests and is at risk of needing long-term care in old age. I assume - as is typical for OECD countries - that the individual is not fully insured against this risk. Moreover, at realization the individual is unable to adapt labor supply or consumption; then expenditures for long-term care result in a one-to-one reduction of the estate. In this situation a tax on bequests provides insurance and its introduction causes a smaller deadweight loss than an income or consumption tax. I also characterize the optimal tax and transfer system in this model.