The Efficiency Cost of Child Tax Benefits
15 Pages Posted: 7 Apr 2009
Date Written: November 2008
Families with children receive preferential treatment in the U.S. federal income tax. Over the past 15 years, the real value of child tax benefits approximately doubled reaching nearly $1,900 per child in 2006. This paper examines the efficiency cost of providing child tax benefits. A representative agent model is used to show how the efficiency cost of providing child tax benefits depends on labor supply and fertility elasticities. The model reveals that cross-price substitution effect for labor supply and children is of primary importance in calculating the efficiency cost. However, there are no estimates of this parameter in the literature. This paper uses data from the National Longitudinal Survey of Youth (NLSY) to estimate this parameter. The estimated cross-price substitution effect implies that children and time spent outside of employment are complements. This implies that the full cost of providing child tax benefits is larger than the reported tax expenditure.
Keywords: Child Tax Benefits, Income Tax, Fertility, Female Labor Supply
JEL Classification: H21, H24, J13
Suggested Citation: Suggested Citation