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Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources

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  • Alexander Gelber

    ()
    (Wharton School, University of Pennsylvania)

  • Matthew Weinzierl

    ()
    (Harvard Business School, Business, Government and the International Economy Unit)

Abstract

Empirical research suggests that parents' economic resources affect their children's future earnings abilities. Optimal tax policy therefore treats future ability distributions as endogenous to current taxes. We model this endogeneity, calibrate the model to match estimates of the intergenerational transmission of earnings ability in the United States, and use the model to simulate such an optimal policy numerically. The optimal policy in this context is more redistributive toward low-income parents than existing U.S. tax policy. It also increases the probability that low-income children move up the economic ladder, generating a present-value welfare gain of one and three-quarters percent of consumption in our baseline case.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 13-014.

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Length: 38 pages
Date of creation: Aug 2012
Date of revision: Mar 2014
Handle: RePEc:hbs:wpaper:13-014

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  1. N. Gregory Mankiw & Matthew C. Weinzierl, 2009. "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution," Harvard Business School Working Papers 09-139, Harvard Business School.
  2. Paxson, Christina & Schady, Norbert, 2005. "Cognitive development among young children in Ecuador : the roles of wealth, health and parenting," Policy Research Working Paper Series 3605, The World Bank.
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Cited by:
  1. Gelber, Alexander & Isen, Adam, 2013. "Children's schooling and parents' behavior: Evidence from the Head Start Impact Study," Journal of Public Economics, Elsevier, vol. 101(C), pages 25-38.

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