Alessandra Casarico and Alessandro Sommacal
Taxation, child care and growth

Abstract: We develop a three-period general equilibrium OLG growth model where human capital is formed both via formal schooling and via child care. In this framework we assess the impact on growth of a policy reform which modifies the tax on labour income. On the one hand, such a reform affects the returns to education and it therefore impinges on the decision to invest in formal schooling: this is the standard effect studied in the literature. On the other hand, it influences the time parents devote to child care and the amount of child care expenditure: this is the new channel we identify. We find that the introduction of child care in the human capital accumulation process may strongly weaken the negative relationship between taxation and growth stemming from the formal schooling channel.

JEL: J22, J26.
Keywords: child care, intergenerational time transfers, labour supply.



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