Taxes, family grants and redistribution

The study works out general conditions under which the introduction of grants based on family size (in replacement of tax exemptions) would increase social welfare and/or reduce inequality for any given two-dimensional distribution of families by income and size. Also analyzed is the trade-off between redistribution and disincentive effects (in the form of output loss or tax evasion) due to changes in the marginal tax rate structure and the introduction of compensatory changes in the tax function. In the latter part of the paper the results of an empirical policy simulation study based on Israeli data are used to illustrate some of the theoretical propositions.