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

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

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Title: Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children' s Abilities Depend on Parents' Resources
Author: Gelber, Alexander; Weinzierl, Matthew Charles

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Citation: Gelber, Alexander, and Matthew Weinzierl. "Equalizing Outcomes vs. Equalizing Opportunities: Optimal Taxation when Children's Abilities Depend on Parents' Resources." Harvard Business School Working Paper, No. 13-014, August 2012.
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Abstract: Empirical research suggests that parents’ economic resources affect their children’s future earnings abilities. Optimal tax policy therefore will treat 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 optimal policy numerically. Optimal policy is more redistributive toward low-income parents than existing U.S. tax policy. The optimal policy increases the probability that low-income children move up the economic ladder, generating a present-value welfare gain of 1.28% of consumption in our baseline case.
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:9556367

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