Child Care Subsidies, Quality, and Optimal Income Taxation

We study child care subsidies in a Mirrleesian optimal tax framework where parents choose both the quantity and quality of child care. Child care services not only enable parents to work, but also contribute to children's human capital. We examine the conditions under which child care expenditures should be encouraged or discouraged by the tax system under different assumptions regarding the available policy instruments. Using a quantitative model calibrated to the US economy, we illustrate the possibility that child care expenditures should be taxed rather than subsidized, and we discuss the merits of public provision schemes for child care.