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Title: Optimal Taxation of Families

Citation Type: Miscellaneous

Publication Year: 2015

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Abstract: This paper examines the optimal taxation of families in an environment in which (i) families earning abilities and tastes for children are private information, and (ii) child-rearing requires both parental time and goods. The optimal tax system combines an income tax schedule for childless families with tax credits for families with children. These components insure parents against low earning ability and high taste for children draws respectively. The parental time and cost of goods involved in childrearing have distinct impacts on the shape of optimal child tax credits. In the quantitative part, I estimate these costs and show that they translate into a pattern of optimal credits that is U-shaped in income. The credit to one (two) child families is decreasing over the first 40% (50%) of the income distribution. In addition, the credit for the second child is not equal to the credit for the first, owing to economies of scale in child-rearing. For median-income families, the credit for the second child equals 44% of the credit for the first child. Finally, I offer a simple linear-income dependent credit policy that achieves most of the welfare gain from the optimum.

Url: https://www.andrew.cmu.edu/user/mkurnaz/jmp.pdf

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Authors: Kurnaz, Musab

Publisher: Tepper School of Business, Carnegie Mellon University

Data Collections: IPUMS CPS

Topics: Other

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