Taxation and Intergenerational Transfers with Family Size Heterogeneity : Do Parents with More Children Prefer Higher Taxes?

This paper examines the implications of family size heterogeneity for Ricardian households and employs survey data to determine whether or not individual household preferences towards taxation conform to the Ricardian model. Using a dynastic model of intergenerational linkages, we show that the expected size of the dynastic family serves as an index of the strength of its intergenerational link to future generations. Heterogeneity in family size leads to conflicting preferences across households over the intertemporal allocation of taxes, with households with larger expected families in favor of current higher taxes. Aggregation over the heterogeneous responses to a tax cut results in a Keynesian propensity to consume, even with operative bequest motives and lump sum taxation. Using the frequency distribution of family size for the U.S., the model yields an increase in consumption of about 20 cents for every $1 in tax cuts. We test the prediction relating family size and tax preferences using survey data from the General Social Survey. Controlling for numerous demographic and socio- economic characteristics of the respondents, we find that, consistent with the model, parents with more children prefer higher taxes. We conclude that family size heterogeneity can potentially reconcile Ricardian behavior at the household level with the estimates of Keynesian response of aggregate consumption to tax cuts