Who should pay an insurance premium for equality of the newborn’s opportunity?

Abstract

In this paper, we develop a three-period model that incorporates parents’ heterogeneous skills and social preferences. Our study shows how the optimal tax system is affected by the weight attached to the newborn child by a social planner. We obtain an unacceptable outcome for the current generation. That is, a high planner’s weighting on the newborn’s welfare makes the optimal capital income tax rate more regressive. In addition, the total tax burden of the highest-productivity parent is decreasing with the planner’s weight. Thus, a low-productivity parent incurs a larger share of parents’ welfare loss. This result follows from the trade-off between incentives for high-productivity parents and insurance for the newborn child.