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

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  • Alexander M. Gelber
  • Matthew C. Weinzierl

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18332.

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Date of creation: Aug 2012
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Handle: RePEc:nbr:nberwo:18332

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  1. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 1-30.
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  19. Akee, Randall K. Q. & Copeland, William & Keeler, Gordon & Angold, Adrian & Costello, Jane E., 2008. "Parents’ Incomes and Children’s Outcomes: A Quasi-Experiment," IZA Discussion Papers 3520, Institute for the Study of Labor (IZA).
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. To achieve the American Dream, you need more redistribution
    by Economic Logician in Economic Logic on 2012-09-18 14:03:00
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Cited by:
  1. Matthew C. Weinzierl, 2014. "Revisiting the Classical View of Benefit-Based Taxation," Harvard Business School Working Papers 14-101, Harvard Business School.

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