Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2017:8: Child Care Subsidies, Quality, and Optimal Income Taxation

Spencer Bastani (), Sören Blomquist () and Luca Micheletto ()
Additional contact information
Spencer Bastani: Department of Economics and Statistics, Linnaeus University
Sören Blomquist: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Luca Micheletto: Department of Law, University of Milan

Abstract: In this paper we examine the desirability of subsidizing child care expenditures in a model where parents can choose both the quantity and the quality of child care services they purchase in the market. Our vehicle of analysis is a Mirrleesian optimal tax framework where child care services not only enable parents to work, but also contribute to children’s formation of human capital. In addition, there are externalities related to the parents’ choice of child care arrangements for their o spring. Using a quantitative simulation model calibrated to the US economy, we evaluate the relative merits of some the most common forms of child care subsidies (tax deductions, tax credits, and opting-out public provision schemes) in terms of their e ectiveness in alleviating the distortions associated with income taxation and increasing the quality of child care chosen by parents.

Keywords: optimal income taxation; child care subsidies; tax deductibility; tax credit; public provision of private goods

JEL-codes: H21; H41

66 pages, June 15, 2017

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