| Abstract: |
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. |