Income tax treatment of families with children

This dissertation advances our knowledge of both how families with children are treated in the tax code and how they should be treated. It documents how child tax benefits in the US federal income tax have changed over time and how they vary with family size, income, marital status and other characteristics. It strongly suggests that there are important child tax benefit features that are not understood by policy makers. US child tax benefits cover a large percentage of the estimated cost of raising children and are similar in value to the child subsidy programs of other developed countries.;The optimal tax treatment of families with children is first considered from the point of view of economic efficiency and then redistribution. The efficiency implications of child tax benefits are derived from a representative agent model. The key finding is that child tax benefits are not optimal if children and leisure (time not spent doing market work) are complements or weak substitutes. Estimation of the demand for children using data on female labor supply and birth histories in the National Longitudinal Survey of Youth implies that children and leisure are complements. Thus, the addition of other distortions (such as externalities) to the model is needed to reverse the finding that a child tax is optimal. Numerical examples of models with multiple agents show that the time cost of raising children is important in determining the distribution of the tax treatment of children. Time series methods are used on US tax and fertility data from 1913 to 2005 to estimate the fertility response to child tax benefits. Findings suggest that fertility responds with a two-year lag and that the increase in the US fertility rate over the past 10 years is partially due to increases in the value of child tax benefits.