Taxing Children: The Re-Distributive Role of Child Benefits - Revisited

Abstract

In this paper, we challenge the conventional wisdom that due to the negative correlation between family size and earning ability, family size can be used as a 'tagging' device, and calls for subsidizing children (via child allowances) to enhance egalitarian objectives. We show that the case for subsidizing children crucially hinges on child allowances being provided on a universal basis. Notably, when child benefits are means-tested, taxing children at the margin (namely, setting the total benefits to decline with the number of children) is socially optimal.

Keywords: child allowance, re-distribution, means-testing, universal, tagging, optimal taxation

JEL Classification: D60, H20, H50