The Impact of Fiscal Instruments on Fertility: A Synthesis of the Economic Theory*

By Kudla, Janusz | Journal of Economics & Management, January 1, 2014 | Go to article overview

The Impact of Fiscal Instruments on Fertility: A Synthesis of the Economic Theory*


Kudla, Janusz, Journal of Economics & Management


Introduction

A general decline in fertility that can be evidenced in developed countries raises the question about the implementation of possible pronatalist government policy. This type of policy can be introduced through fiscal instruments posing incentives to have more children. Naturally, the key issue is to determine whether fiscal policy instruments, such as: income taxes, consumption taxes and subsidies on children may affect fertility in a meaningful way. In general this issue can be considered from both theoretical and empirical point of view.

The present work mainly focuses on the first approach, making a synthesis of existing economic theory in terms of the postulated effects of fiscal instruments on the number of children in families. At the same time the details of individual solutions are characterized from a methodological point of view, high- lighting the two prevalent classes of models: the life cycle models with taxpayer having children and multi-period overlapping generation models. Unfortunately some simplifying assumptions of these models undermine the practical utility of a part of the obtained results.

A survey of the theory could be useful for stating the new hypotheses for empirical testing, for the development of better economic models and for the determination of the state policy promoting fertility. From the conducted review it can be seen that regardless of the context of redistribution of wealth the fiscal instruments should affect the number of children in households. At the same time there is more than one effective pronatalist policy that can be implemented. In most cases such a policy should also cover more than one fiscal policy instrument stimulating higher fertility.

The article is constructed as follows: Firstly, the theoretical literature is reviewed with a critical assessment of its assumptions and outcomes. Secondly, in conclusion, further theory development is provided which can also be treated as postulate for future research.

1. The taxation of family when fertility is exogenous

The family size can be driven by economic factors. This statement was firstly proposed by G. Becker, who started the theoretical discussion on the possibility of the social state policy stimulating the optimal number of children. For example, if the choice of consumption and fertility is simultaneous then in the overlapping generation framework with altruistic parents, the fertility should be positively affected by: the world's long-term real interest rate, the degree of altruism and the growth of child-survival probabilities and negatively affected by the rate of technical progress and the growth rate of social security (Becker, Barro, 1988). Therefore the taxation can decrease the fertility rate only in one generation and it does not impact the optimal path of fertility rate if the long term interest rate remains unchanged. There are two caveats to this approach; firstly it is dubious whether altruism is an important factor in fertility decisions; secondly the fertility could be considered exogenous or endogenous. Nevertheless it should be noted that the many theoretical works assume fertility to be exogenous (Mirrlees, 1972; Cremer, Dellis, Pestieau, 2003). It means that the number of children stays beyond the control of families. This assumption is often used as a starting point for comparison with the solutions implied by models of endogenous fertility. However, it seems implausible to set up the total lack of control over the number of children in families*.

The optimal linear taxation of family size literature was initiated by the paper of J. Mirrlees (1972). He constructed the economic model with uncertainty, different tastes and unequal exogenous fertility across families. Based on the distributional reasoning, the taxation or subsidization of family size had been proposed. According to his statement, the families with marginal product of labor below the average product should be taxed and families with marginal product exciding the average one - should be subsidized. …

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