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Optimal Taxation with a Trade-Off Between Income and Children

Optimal Taxation with a Trade-Off Between Income and Children Abstract This paper explores the implications of endogenous fertility for optimal redistributive taxation in the presence of a trade-off between labour income and children. The labour supply is a decreasing function of the desired quantity and quality of children. Since children enter into the parent’s budget constraint in a nonlinear form, their shadow prices are directly distorted by the income tax rate. It is shown that the substitution effects of the income tax rate on the quantity and quality of children cannot be signed uniquely although the effect on labour supply is negative. The aggregate substitution effect of the income tax rate on the quantity of children plays an important role in the determination of the signs of the income tax and child subsidy rates at a Rawlsian or Benthamite social welfare optimum. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Japanese Economic Review Springer Journals

Optimal Taxation with a Trade-Off Between Income and Children

Yoshida, Masatoshi
The Japanese Economic Review , Volume 49 (4): 14 – Dec 1, 1998
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References (9)

Publisher
Springer Journals
Copyright
1998 Japanese Economic Association
ISSN
1352-4739
eISSN
1468-5876
DOI
10.1111/1468-5876.00094
Publisher site
See Article on Publisher Site

Abstract

Abstract This paper explores the implications of endogenous fertility for optimal redistributive taxation in the presence of a trade-off between labour income and children. The labour supply is a decreasing function of the desired quantity and quality of children. Since children enter into the parent’s budget constraint in a nonlinear form, their shadow prices are directly distorted by the income tax rate. It is shown that the substitution effects of the income tax rate on the quantity and quality of children cannot be signed uniquely although the effect on labour supply is negative. The aggregate substitution effect of the income tax rate on the quantity of children plays an important role in the determination of the signs of the income tax and child subsidy rates at a Rawlsian or Benthamite social welfare optimum.

Journal

The Japanese Economic Review – Springer Journals

Published: Dec 1, 1998

Keywords: economics, general; microeconomics; macroeconomics/monetary economics//financial economics; econometrics; development economics; economic history

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