Intergenerational mobility and optimal income taxation

While the empirical literature on intergenerational mobility is politically controversial, it is not obvious what the implications of intergenerational status transmission for optimal policy are. Addressing this question, this paper studies the local comparative statics of optimal income taxes with respect to parameters of intergenerational transmission. The model used extends standard models of optimal linear income taxation, adding a parental preference for child earnings capability, an educational investment opportunity, and credit constraints. We find that the optimal degree of redistribution, everything else equal, is increasing in the curvature of intergenerational transmission. This is because the non-linearity in the household budget set affects the curvature of household indirect utility as a function of virtual income. In contrast, the implications of stronger transmission for redistribution are ambiguous. The strength of transmission matters, however, for the optimal government budget deficit.