Working Paper | HBS Working Paper Series | 2014

Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation When Children's Abilities Depend on Parents' Resources

by Alexander Gelber and Matthew 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: Equality and Inequality; Income Characteristics; Taxation; Policy; Outcome or Result; Public Administration Industry; United States;

Citation:

Gelber, Alexander, and Matthew Weinzierl. "Equalizing Outcomes and Equalizing Opportunities: Optimal Taxation When Children's Abilities Depend on Parents' Resources." Harvard Business School Working Paper, No. 13-014, August 2012. (Updated April 2014. NBER Working Paper Series, No. 18332)