The Efficiency Cost of Child Tax Benefits

15 Pages Posted: 7 Apr 2009

Date Written: November 2008

Abstract

Families with children receive preferential treatment in the U.S. federal income tax. Over the past 15 years, the real value of child tax benefits approximately doubled reaching nearly $1,900 per child in 2006. This paper examines the efficiency cost of providing child tax benefits. A representative agent model is used to show how the efficiency cost of providing child tax benefits depends on labor supply and fertility elasticities. The model reveals that cross-price substitution effect for labor supply and children is of primary importance in calculating the efficiency cost. However, there are no estimates of this parameter in the literature. This paper uses data from the National Longitudinal Survey of Youth (NLSY) to estimate this parameter. The estimated cross-price substitution effect implies that children and time spent outside of employment are complements. This implies that the full cost of providing child tax benefits is larger than the reported tax expenditure.

Keywords: Child Tax Benefits, Income Tax, Fertility, Female Labor Supply

JEL Classification: H21, H24, J13

Suggested Citation

Mumford, Kevin J., The Efficiency Cost of Child Tax Benefits (November 2008). Available at SSRN: https://ssrn.com/abstract=1373901 or http://dx.doi.org/10.2139/ssrn.1373901

Kevin J. Mumford (Contact Author)

Purdue University ( email )

West Lafayette, IN 47907-1310
United States
7654966773 (Phone)
7654967434 (Fax)

HOME PAGE: http://www.mgmt.purdue.edu/faculty/kjmumfor/home.asp

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