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

From Alex Gelber and Matthew Weinzierl:

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 more than two and one half percent of consumption in our baseline case.

These policies also have material impacts on growth.

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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One Response to Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation when Children’s Abilities Depend on Parents’ Resources

  1. Pingback: Alex Gelber and Matthew Weinzierl: Equalizing Outcomes and Equalizing Opportunities: Noted for July 28, 2013

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