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The Efficiency Cost of Child Tax Benefits

Kevin Mumford

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: Families with children receive preferential treatment in the U.S. federal income tax. Over the past 15 years, the real value of child tax benefits approximately doubled reaching nearly $1,900 per child in 2006. This paper examines the efficiency cost of providing child tax benefits. A representative agent model is used to show how the efficiency cost of providing child tax benefits depends on labor supply and fertility elasticities. The model reveals that cross-price substitution effect for labor supply and children is of primary importance in calculating the efficiency cost. However, there are no estimates of this parameter in the literature. This paper uses data from the National Longitudinal Survey of Youth (NLSY) to estimate this parameter. The estimated cross-price substitution effect implies that children and time spent outside of employment are complements. This implies that the full cost of providing child tax benefits is larger than the reported tax expenditure.

Keywords: fertility; income tax; child tax benefits; female labor supply (search for similar items in EconPapers)
JEL-codes: H21 H24 J13 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2008-11
New Economics Papers: this item is included in nep-hap, nep-lab, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1220

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