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

Alexander M. Gelber, Matthew C. Weinzierl

NBER Working Paper No. 18332
Issued in August 2012
NBER Program(s):   CH   PE

Empirical research suggests that parents’economic resources affect their children's future earnings abilities. Optimal tax policy, defined as the policy that maximizes the aggregate present-value dynastic utility of existing families, 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 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 1.28% of consumption in our baseline case.

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Acknowledgments and Disclosures

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