Working Paper: NBER ID: w18332
Authors: Alexander M. Gelber; Matthew C. Weinzierl
Abstract: 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.
Keywords: Optimal Taxation; Intergenerational Mobility; Parental Resources; Children's Abilities
JEL Codes: H21; I30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Parental economic resources (J12) | Children's cognitive abilities (G53) |
| Optimal tax policy (H21) | Economic mobility of low-income children (J62) |
| Parental resources (J12) | Children's abilities (G53) |
| Children's cognitive abilities (G53) | Future earnings abilities (J17) |
| Parental economic resources (J12) | Future earnings abilities (J17) |