Long-Run Effects of Family Income on Children’s Education and Employment Outcomes across the Family Income Distribution

• In Event: Strengthening the U.S. safety net and transfer programs for low-income families

Abstract

When it comes to supporting children’s overall development, income matters. A robust literature shows that when families’ income increases, so too does children’s health (Averett & Wang, 2018; Braga et al., 2020; Hoynes et al., 2016), educational attainment (Akee et al., 2010; Bastian & Michelmore, 2018), and earnings in adulthood (Aizer et al., 2016; Bailey et al., 2024; Barr et al., 2022; Bastian & Michelmore, 2018; Hoynes et al., 2016), among other positive outcomes. At the same time, economic theory on intergenerational transmission of human capital  (Becker & Tomes, 1979, 1986), and the principle of diminishing marginal returns to income which underlies key insights from optimal tax theory (Diamond & Saez, 2011; Piketty & Saez, 2013; Stiglitz, 1987), suggest the utility derived from income declines as income increases. For example, $100 in tax relief for a higher-income family may not yield the same benefits in terms of children’s outcomes as $100 for a lower-income family. However, we do not know how these effects vary in the U.S. This study will examine whether and how the effects of family income on children’s long-term educational and employment outcomes vary across the family income distribution.  I will use a simulated instrument to identify exogenous variation in family income, exploiting the substantial variation in families’ post-tax income resulting from legislated changes to the federal income tax. I will estimate the long-term effects of these exogenous income changes on children’s outcomes using data from the 1968–2021 waves of the Panel Study of Income Dynamics (PSID). To capture potential non-linearities in this relationship, I will employ a quadratic second-stage estimation, a control function approach, and a non-parametric instrumental variable estimation method.Overall, this study aims to provide insights into how effectively federal tax expenditures on families, which affect their income, enhance broader social welfare in terms of long-term educational and employment outcomes, and where these welfare gains are most concentrated.

Author

• Sophie Marie Collyer, Columbia University
  Presenting Author