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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. Borys Grochulski & Tomasz Piskorski, 2007. "Risky human capital and deferred capital income taxation," Working Paper 06-13, Federal Reserve Bank of Richmond.
  2. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," American Economic Review, American Economic Association, vol. 96(4), pages 1308-1320, September.
  3. 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.
  4. Rothschild, Casey & Scheuer, Florian, 2014. "Optimal Taxation with Rent-Seeking," CEPR Discussion Papers 10247, C.E.P.R. Discussion Papers.
  5. 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..
  6. Anderberg, Dan, 2009. "Optimal policy and the risk properties of human capital reconsidered," Journal of Public Economics, Elsevier, vol. 93(9-10), pages 1017-1026, October.
  7. 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.
  8. Macours, Karen & Schady, Norbert & Vakis, Renos, 2008. "Cash transfers, behavioral changes, and cognitive development in early childhood : evidence from a randomized experiment," Policy Research Working Paper Series 4759, The World Bank.
  9. 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.
  10. 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.
  11. Emmanuel Farhi & Iván Werning, 2010. "Progressive Estate Taxation," The Quarterly Journal of Economics, Oxford University Press, vol. 125(2), pages 635-673.
  12. Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers 4006, C.E.P.R. Discussion Papers.
  13. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  14. Katrine V. Løken & Magne Mogstad & Matthew Wiswall, 2012. "What Linear Estimators Miss: The Effects of Family Income on Child Outcomes," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 1-35, April.
  15. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  16. N. Gregory Mankiw & Matthew Weinzierl, 2009. "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution," NBER Working Papers 14976, National Bureau of Economic Research, Inc.
  17. Marek Kapicka, 2006. "The Dynamics of Optimal Taxation when Human Capital is Endogenous," 2006 Meeting Papers 349, Society for Economic Dynamics.
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