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

  • Alexander Gelber

    ()

    (Wharton School, University of Pennsylvania)

  • Matthew Weinzierl

    ()

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

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 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. Marek Kapicka, 2006. "The Dynamics of Optimal Taxation when Human Capital is Endogenous," 2006 Meeting Papers 349, Society for Economic Dynamics.
  2. Dan Anderberg, 2008. "Optimal Policy and the Risk Properties of Human Capital Reconsidered," CESifo Working Paper Series 2451, CESifo Group Munich.
  3. 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.
  4. Karen Macours & Norbert Schady & Renos Vakis, 2011. "Cash Transfers, Behavioral Changes, and Cognitive Development in Early Childhood: Evidence from a Randomized Experiment," Working Papers 2011-007, Human Capital and Economic Opportunity Working Group.
  5. Rothschild, Casey & Scheuer, Florian, 2014. "Optimal Taxation with Rent-Seeking," CEPR Discussion Papers 10247, C.E.P.R. Discussion Papers.
  6. Alexander M. Gelber, 2011. "How Do 401(k)s Affect Saving? Evidence from Changes in 401(k) Eligibility," American Economic Journal: Economic Policy, American Economic Association, vol. 3(4), pages 103-22, November.
  7. Christina Paxson & Norbert Schady, 2005. "Cognitive Development Among Young Children in Ecuador: The Roles of Wealth, Health and Parenting," Working Papers 239, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
  8. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," NBER Working Papers 11943, National Bureau of Economic Research, Inc.
  9. Laurence J. Kotlikoff & David Rapson, 2007. "Does It Pay, at the Margin, to Work and Save? Measuring Effective Marginal Taxes on Americans' Labor Supply and Saving," NBER Chapters, in: Tax Policy and the Economy, Volume 21, pages 83-144 National Bureau of Economic Research, Inc.
  10. Grochulski, Borys & Piskorski, Tomasz, 2010. "Risky human capital and deferred capital income taxation," Journal of Economic Theory, Elsevier, vol. 145(3), pages 908-943, May.
  11. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  12. Løken, Katrine Vellesen & Mogstad, Magne & Wiswall, Matthew, 2011. "What Linear Estimators Miss: The E ects of Family Income on Child Outcomes," Working Papers in Economics 02/11, University of Bergen, Department of Economics.
  13. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  14. Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October.
  15. Randall K. Q. Akee & William E. Copeland & Gordon Keeler & Adrian Angold & E. Jane Costello, 2010. "Parents' Incomes and Children's Outcomes: A Quasi-experiment Using Transfer Payments from Casino Profits," American Economic Journal: Applied Economics, American Economic Association, vol. 2(1), pages 86-115, January.
  16. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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