Optimal Taxation When Children’s Abilities Depend on Parents’ Resources
With Matthew Weinzierl. National Tax Journal 2016, 69(1), 11-40 (lead article; winner of the Musgrave Prize for the best paper in the National Tax Journal in 2016).
Empirical research suggests that parents, and therefore tax policy that affects them, can have a significant effect on their children’s future earnings abilities. We take a first step toward characterizing how this intergenerational link matters for tax policy design. We find that the utilitarian welfare-maximizing policy in this context would be more redistributive toward low-income parents than under current U.S. tax policy. The additional income under such a policy would increase the probability that low-income children move up the economic ladder, and we estimate that it would thereby generate an aggregate welfare gain equivalent to 1.75 percent of lifetime consumption.
Download a PDF (462KB)