Optimal Child Benefits and Income Taxes

Abstract

This chapter deals with optimal child benefits when fertility is endogenous and younger workers raise children and older workers only contribute to financing the child benefits. It is assumed that the wages are heterogeneous and personal income taxes finance only benefits but a basic income for everybody. Earlier models worked with homogeneous wages and assumed that the child benefit is only spent on raising children. Now the raising cost of a child is proportional to the net family income, containing the child benefits. The parent’s consumption becomes a nonlinear function of the fertility, which complicates the analysis but avoids absurdities. The main results is that child benefit is socially optimal if an only if the past fertility rate was less than 2 (1 in our unisex model).