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International Tax and Public Finance

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01.06.2015

The Re-distributive Role of Child Benefits Revisited

verfasst von: Tomer Blumkin, Yoram Margalioth, Efraim Sadka

Erschienen in: International Tax and Public Finance | Ausgabe 3/2015

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Abstract

In this paper, we reexamine the commonly invoked argument that due to the existence of a negative correlation between earning ability and family size, the latter can be used as a “tagging” device, justifying subsidizing children (via provision of child allowances) to enhance egalitarian objectives. Employing a benchmark setting where the quality–quantity paradigm holds, we show that the case for subsidizing children is far from being a forgone conclusion. We demonstrate that the desirability of subsidizing children crucially hinges on whether benefits are means-tested or are offered on a universal basis.

Vorheriger Artikel A race beyond the bottom: the nature of bidding for a firm

Nächster Artikel Intellectual property box regimes: effective tax rates and tax policy considerations

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In some countries, such as Israel and most European countries (the notable exception is Italy), child benefits are provided on a universal basis; namely, child benefits do not depend on household’s income (but usually vary with the number of children). In other countries, such as the US and Australia, child benefits are means-tested. In some countries, there are means-tested child benefits on top of universal benefits. In this paper, we draw attention to the importance of distinguishing between a universal and a means-tested system, in analyzing re-distributive policy implications of child benefits.

For evidence of the existence of a quality–quantity trade-off see, e.g., Hanushek (1992).

As differences in earning ability are assumed to be the single source of heterogeneity in the economy, we refrain from introducing horizontal equity considerations into the analysis.

Notice that both \(e\) and \(\alpha \) are measured per capita; hence, there are no economies of scale embodied in the consumption of children. For given levels of child-related consumption, \(e\), and time of attention, \(\alpha \), the cost of provision is increasing in the number of children.

The variable \(e\) is henceforth interpreted as the level of parental provision of child-related consumption goods, such as education (Becker 1991), but may well take additional plausible interpretations, such as the maximized lifetime utility of each child (Becker and Barro 1988). An alternative interpretation of the utility form given in Eq. (1) is that g(\(l\), \(n\),\( e\), \(\alpha ) = \hbox {s}[l, n, x(e,\alpha )]\), where \(x\) denotes the domestic production function of “quality” (child-related consumption) employing parental time as well as market goods such as private tutoring and day-care services as inputs [see Cigno (2001)].

By continuity considerations, provided that the utility function is separable between parental consumption, \(c\), and its other arguments \((l,n,e\hbox { and }\alpha )\), accommodating moderate income effects will not change the qualitative nature of our results.

We acknowledge that parents have less than perfect control over the number of children (by proper choice of intercourse frequency, the use of contraceptives, etc.). For a recent paper that allows households to control only the probability distribution of the number of children, see Cigno and Luporini (2011). For models assuming exogenous fertility see, for instance, Cremer et al. (2003).

Higher skilled households will partially mitigate this by replacing their own time inputs with relatively cheaper outsourced day-care/tutoring services (via choosing to increase \(e\) and decrease \(\alpha \)). We will further discuss this point below.

We will henceforth assume that the second-order conditions are always satisfied, thus employ first-order conditions only to characterize the individual incentive constraints when formulating the government problem. This latter assumption will ensure no “bunching” in the optimal solution of the government problem [see Ebert (1992), for a rigorous treatment of “bunching” in the context of optimal non-linear labor income tax in the continuum case].

Notice that to obtain our qualitative results, all we need is a negative correlation between quantity (number of children) and ability (of parents). Our qualitative results would remain unchanged even if quality were fixed at some exogenous level. In our setting, quality is endogenously determined by the households and quantity and quality are negatively related in the benchmark (no-tax) case, in line with the quality–quantity paradigm.

In a previous version of the paper, we have examined the simpler case where \(\alpha \) is a fixed parameter (rather than being endogenously determined, as we assume). In this case, the negative correlation between the skill level and family size is satisfied with the additively separable functional form, without imposing additional assumptions [see Moav (2005) for a similar setting].

With a bounded skill distribution, the standard efficiency at the top property continues to hold; namely, the marginal tax on children is zero for the top-earning household.

This is essentially the rationale underlying the common use of equivalence scales.

Note that conditioning transfers on family size serves as a second-best “tagging” device because fertility is an endogenous variable in our setting, which responds to financial incentives offered by the government [for recent empirical attempts to estimate the effect of financial incentives on fertility, see Cohen, Dehejia and Romanov (2007) and Laroque and Salanie (2012)].

It is important to emphasize that, in equilibrium, high-ability households will choose to spend more hours in the labor market and raise a lower number of children, relative to low-ability households. However, our argument suggests that if they mimic the low-ability households (an out-of-equilibrium strategy which will not be incentive compatible by construction of our optimal policy rule), then by choosing the same level of income, they will find it relatively cheaper to raise children.

Cigno (2001) and Balestrino and Cigno (2002) demonstrate the “tagging” role played by child benefits.

This observation was first made by Cigno (1986).

Our key assumption, which we find plausible, is that nurturing cannot be entirely outsourced. Hence, to some extent, raising children always requires some parental investment of time (the opportunity cost of which varies across households with different earning abilities).

We will examine, in particular, the desirability of providing a marginal child subsidy, when the labor income tax is set at the optimum. The reason we choose to analyze also the case with an arbitrarily given income tax schedule is in order to highlight the relationship between the shape of the income tax schedule and the desirable properties of the child benefit system. In addition, the exercise may also have some practical implications, as reforms in the child benefit schedule often takes place without being accompanied by adjustments to the income tax schedule (see e.g., a comprehensive child benefit reform that took place in Israel in 2003).

One may argue that, in practice, most income tax systems exhibit marginal tax rate progressivity; namely, the statutory marginal tax rate is rising with (gross) income. However, when the bulk of welfare (transfer) programs are means-tested, the effective marginal tax rate at low levels of gross income is relatively high. Therefore, the integrated tax-transfer system exhibits marginal tax regressivity at the lower end of the income distribution; namely, the effective marginal tax rate is decreasing with (gross) income. Clearly, the marginal tax rates derived in our context are the effective rather than the statutory ones.

Notice the difference between the labor supply elasticity used in condition (14) and the standard elasticity estimated by the voluminous empirical literature, as it takes into account additional factors such as fertility and time dedicated to nurturing children who are related to labor supply decisions. We expect that the magnitude of our extended new notion of labor supply elasticity to be greater than the elasticity provided by the empirical literature (which is fairly small in most studies). We are unable to quantify this magnitude due to lack of empirical evidence.

Notice that over the income-range where the tax rate is optimally set to be flat, the marginal child subsidy is unambiguously negative (that is, a marginal tax). This is in contrast to the general case, where, with an arbitrary flat-rate system in place, we have shown the result to be ambiguous.

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Titel: The Re-distributive Role of Child Benefits Revisited
verfasst von: Tomer Blumkin
Yoram Margalioth
Efraim Sadka
Publikationsdatum: 01.06.2015
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 3/2015
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-014-9327-y

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