Optimal Taxation: Inequality and Family Size

University Of Minnesota-Twin Cities, Minneapolis MN

Investigators

Abstract

The purpose of this research is to add to our knowledge about how social safety sets should be designed. These always involve an important trade-off--we have to balance the benefits gained from providing benefits to those individuals in society who are unfortunate against the costs from discouraging people from working because taxes are too high. The specific issue that this research focuses on is how family size should enter into the equation. This is important because it will help us understand how key features of the tax code should be constructed. Examples include setting the size of tax deductions for children, the treatment of child care costs and the deductibility of expenses for post secondary education. On top of this, new methodological techniques will be developed that will improve our understanding of the way that labor and capital income tax systems should be designed to manage this trade-off between social risk sharing and economic efficiency. Intellectual Merit: The research will involve significant methodological improvements over existing methods for analyzing the right amount of social insurance. Currently, these methods either restrict themselves to static settings (so that dynamic variables such as savings, education and family size cannot be included) or rely on assumptions that society values future generations more highly that parents do themselves. While both of these currently available methodologies are useful, they are also limited because of their implicit strong assumptions. This research will provide a useful additional tool to help understand these problems better. Broader Impacts: The development of methods like these are critical to our understanding of broader policy issues. For example: Should government policies explicitly encourage savings above and beyond what individuals would normally undertake on their own? And if so, what form should these policies take? How is the answer to this question tempered by the need to other succient incentives for individuals to work hard? Since private savings decisions are intimately related to the design of Social Security and Medicare systems, the development of these new techniques should also prove useful for policy debates concerning those systems. In addition to this, the methods developed should be useful for a variety of other, related, research programs in economics, including, but not limited to the study of the family (i.e., wife, husband and children) allocation of labor supply, home production and consumption.