The Political Economy of Subsidized Day Care

Abstract

This paper presents a theoretical model of political support for public provision of day care. In an economy where there are high taxes on wage income, selfish taxpayers with no children in the day care system may favor substantial public subsidies to day care because such subsidies induce mothers to join the labor force and hence pay income tax. Our model makes explicit quantitative predictions of the relation between the distribution of wages, the income tax rate, and the subsidy rate for day care that maximizes net tax revenue from parents of small children. Applying parameter values from Sweden and the United States, we find that our model predicts a subsidy rate of between 50% and 100% for Sweden with its high tax rate on wages and between 15% and 30% for the U.S. with its lower tax rate on wages.