Optimal Taxation: The Design of Child-Related Cash and In-Kind Benefits

In this paper, we empirically derive the welfare function that guarantees that the current German tax and transfer system for single women is optimal. In particular, we compare the welfare function conditional on the presence and age of children and assess how recent reforms of in-kind childcare transfers affect the welfare function. Our analysis is based on a discrete model of optimal taxation. We apply this framework using microsimulation and microeconometric techniques. In general, we find that marginal welfare weights are relatively high for non-working single women. Further, we show that the reform of in-kind childcare transfers is only optimal if society increases the marginal welfare weights for the working single women.