The optimal linear income tax with tax credits contingent on fertility |
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| Affiliation: | 1. University of Graz, Universitätsstrasse 15 / F4, 8010 Graz, Austria;2. Center for Mathematical Economics, Bielefeld University, Postfach 10 01 31, 33501 Bielefeld, Germany;1. Darden School of Business, University of Virginia, 100 Darden Blvd, Charlottesville, VA 22903, USA;2. Department of Computer Science, Rutgers University, 110 Frelinghuysen Road, Piscataway, NJ 08854, USA;3. School of Engineering and Applied Sciences, Harvard University, 150 Western Ave, Boston, MA 02134, USA;4. Microsoft Research New York City, 300 Lafayette Street, New York, NY 10012, USA |
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| Abstract: | The literature on the optimal linear income tax is extended by incorporating tax credits contingent on the number of dependents the taxpayer is responsible for. The choice over how many dependents to be responsible for is made endogenous by allowing taxpayers a choice over their own fertility. Formulae are derived governing the government's optimal choice of the labor income tax rate and the tax credit contingent on fertility. It is also shown that if the government chooses its policy based on the belief that fertility behavior is exogenous when it is actually endogenous, then a suboptimal policy will be chosen. If certain conditions are fulfilled the government will choose a labor income tax rate lower than that which is actually optimal. |
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