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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.

Suggested Citation

  • Alexander M. Gelber & Matthew C. Weinzierl, 2012. "Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources," NBER Working Papers 18332, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18332
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    References listed on IDEAS

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    1. To achieve the American Dream, you need more redistribution
      by Economic Logician in Economic Logic on 2012-09-18 19:03:00

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    Cited by:

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    3. Matthew Weinzierl, 2018. "Revisiting the Classical View of Benefit‐based Taxation," Economic Journal, Royal Economic Society, vol. 128(612), pages 37-64, July.
    4. 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.
    5. Findeisen, Sebastian & Sachs, Dominik, 2015. "Designing efficient college and tax policies," Working Papers 15-09, University of Mannheim, Department of Economics.
    6. Stefanie Stantcheva, 2015. "Learning and (or) Doing: Human Capital Investments and Optimal Taxation," NBER Working Papers 21381, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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