Child Care Subsidies, Quality, and Optimal Income Taxation

Abstract

We study child care subsidies in a Mirrleesian optimal tax framework where parents choose both the quantity and quality of child care. Child care services not only enable parents to work, but also contribute to children’s human capital. We examine the conditions under which child care expenditures should be encouraged or discouraged by the tax system under different assumptions regarding the available policy instruments. Using a quantitative model calibrated to the US economy, we illustrate the possibility that child care expenditures should be taxed rather than subsidized, and we discuss the merits of public provision schemes for child care. (JEL H21, H24, H41, J13)

Pareto-Efficient Tax Deductions

“…An important class of household services (and work-related goods more generally) is child care. Our paper is therefore related to recent works by Ho and Pavoni (2016) and Bastani et al (2017), who study the optimal design of child care subsidies. Their focus is on describing properties of particular welfare optima in the context of child care, whereas our focus is on Pareto-improving reforms, deduction rules as an implementation device, and household services other than care.…”

Understanding Different Approaches to Benefit-Based Taxation

“…Nevertheless, more detailed analysis of that possibility-and its implications for optimal tax-has been largely neglected. A related but distinct line of study has been of the optimal public provision of (at least partially) private goods: see Blomquist and Micheletto (2016) and Bastani and Micheletto (2017).…”

Pareto-Efficient Tax Breaks

“…We also show how the "Siamese Twins" result by Bovenberg and Jacobs (2005) can be interpreted in our environment. Further, our paper is related to Ho and Pavoni (2016) and Bastani et al (2017), who study the efficient design of child care subsidies. Their focus is on describing properties of particular welfare optima in the context of child care, whereas our focus is on Pareto-improving reforms.…”