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

Author

Listed:
  • 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.

Suggested Citation

  • Alexander Gelber & Matthew Weinzierl, 2012. "Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources," Harvard Business School Working Papers 13-014, Harvard Business School, revised Mar 2014.
    • Handle: RePEc:hbs:wpaper:13-014
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    References listed on IDEAS

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    Cited by:

    1. Matthew Weinzierl, 2018. "Revisiting the Classical View of Benefit‐based Taxation," Economic Journal, Royal Economic Society, vol. 128(612), pages 37-64, July.
    2. 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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