38 Pages Posted: 7 Aug 2012 Last revised: 16 Apr 2014
Date Written: April 15, 2014
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: Suggested Citation
Gelber, Alexander M. and Weinzierl, Matthew, Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation When Children's Abilities Depend on Parents' Resources (April 15, 2014). Harvard Business School BGIE Unit Working Paper No. 13-014. Available at SSRN: https://ssrn.com/abstract=2125435 or http://dx.doi.org/10.2139/ssrn.2125435