Optimal Tax Policies for Social Mobility With Wealth and Education Investments

ABSTRACT We consider a society where social mobility is influenced by parental wealth transfers and education investments, with the latter capturing the time parents devote to the education of their children. These investments affect not only children's individual prospects but also the future distribution of productivity and wealth, an effect that parents do not internalize. We characterize optimal non‐linear taxation under two alternative informational assumptions, depending on whether educational investments are observable. When education is observable, marginal subsidies to education and wealth transfers can directly correct for their effects on the future distribution. When education is unobservable, income and wealth‐transfer taxation also serve as indirect instruments to influence parental education investments. In particular, a positive marginal income tax on high‐productivity individuals can be optimal, in contrast with the standard no‐distortion‐at‐the‐top result. We derive these results under a weighted utilitarian criterion and examine how they change under a Rawlsian social objective.