Child Care Subsidies, Quality, and Optimal Income Taxation

68 Pages Posted: 20 Jul 2017

See all articles by Spencer Bastani

Spencer Bastani

IFAU - Institute for Labour Market Policy Evaluation; Linnaeus University - Department of Economics and Statistics; Research Institute of Industrial Economics (IFN)

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luca Micheletto

University of Milan

Date Written: June 28, 2017

Abstract

In this paper we examine the desirability of subsidizing child care expenditures in a model where parents can choose both the quantity and the quality of child care services they purchase in the market. Our vehicle of analysis is a Mirrleesian optimal tax framework where child care services not only enable parents to work, but also contribute to children’s formation of human capital. In addition, there are externalities related to the parents’ choice of child care arrangements for their offspring. Using a quantitative simulation model calibrated to the US economy, we evaluate the relative merits of some the most common forms of child care subsidies (tax deductions, tax credits, and opting-out public provision schemes) in terms of their effectiveness in alleviating the distortions associated with income taxation and increasing the quality of child care chosen by parents.

Keywords: optimal income taxation, child care subsidies, tax deductibility, tax credit, public provision of private goods

JEL Classification: H210, H410

Suggested Citation

Bastani, Spencer and Blomquist, Soren and Micheletto, Luca, Child Care Subsidies, Quality, and Optimal Income Taxation (June 28, 2017). CESifo Working Paper Series No. 6533, Available at SSRN: https://ssrn.com/abstract=3004348

Spencer Bastani (Contact Author)

IFAU - Institute for Labour Market Policy Evaluation ( email )

Box 513
751 20 Uppsala
Sweden

Linnaeus University - Department of Economics and Statistics ( email )

Växjö, 351 06
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Soren Blomquist

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1102 (Phone)
+46 18 471 1478 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Luca Micheletto

University of Milan ( email )

Via Festa del Perdono, 7
Milan, 20122
Italy

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