Optimal Taxation of Families: Mirrlees Meets Becker

Musab Kurnaz

The Economic Journal, 2021, vol. 131, issue 639, 2984-3011

Abstract: This paper studies optimal taxation of families—a combination of an income tax schedule and child tax credits. Child-rearing requires both goods and parental time, which distinctly impact the design of optimal child tax credits. In the quantitative analysis, I calibrate my model to the US economy and show that the optimal child tax credits are U-shaped in income and decrease with family size. In particular, the optimal credits decrease in the first nine deciles of the income distribution and then increase thereafter. Implementing the optimum yields large welfare gains.

Date: 2021
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