TCS Daily

Taxing Infertility

By Pavel Kohout - June 30, 2005 12:00 AM

Among the proposals being put forward in the Czech Republics debate over reform of the pay-as-you-go pension system are ideas to promote birthrates via both tax advantages and tax penalties. According to one such proposal, backed by the Christian Democrats, parents with children would pay lower social security payroll taxes. The childless or unmarried would be penalized as black passengers who do not contribute to the system by procreating new taxpayers.

This is interesting mainly as an example of a deeply and dangerously flawed idea. Lets not discuss details such as its injustice towards infertile couples. The proposal is not only ineffective; in fact, it would most likely have exactly the opposite effect than intended. Implementing a tax penalty for the childless would probably hurt the fertility rate.

How is that possible? Lets look at the problem from an economic point of view. All citizens, parents or childless, pay a certain total amount of taxes. If some group receives a benefit, the other group is penalized (putting aside pro-growth Laffer-curve effects, as long as we are speaking about payroll taxes). What happens if the tax burden for families with children is cut at the expense of the childless? We can expect only a small increase in the fertility rate among families with children. If you already have two children, would you be likely to have another just because of a tax advantage? Maybe, but generally, tax stimuli are not a significant factor in family planning. The marginal increase in the birthrate as a result of tax advantages would be nearly negligible.

However, there would be a more significant impact on the fertility rate within the group of people who do not yet have children. An increased tax burden would make it more expensive to form a family. People normally marry and procreate only after they have achieved a certain level of financial strength and independence. This rule has been an ages-old norm for human behavior with the exception of welfare state-dependent classes for whom child benefits constitute a major part of their income. Imposing tax penalties for the unmarried might delay procreation by several years, thus cutting the marginal fertility rate. Some of these people would remain unmarried forever. The total impact of pro-family tax policies would certainly be negative.

One might argue that this is nothing but speculative theory. However, there is robust empirical evidence. In 1927, Italian duce Benito Mussolini launched a program called Battle for Births. Mussolini believed that Italy had fewer people than it needed in order to play the part of a major world power. By the beginning of the 1920s, Italy had 37 million citizens. Il Duce set the number of 60 million by the year 1950 as national target. To achieve this target, Mussolini introduced generous benefits, especially for families with multiple children. Fathers of six or more paid no taxes at all. Of course, tax penalties for the unmarried were introduced, too. Abortions were outlawed, and contraception was hard to obtain. Later, career obstacles for unmarried men were officially introduced, mainly in government administration.

The fascist government in Italy lasted long enough in peacetime that we may know its results. Exactly as economic theory would predict, the birthrate fell from 1927 to 1934. So did the number of marriages. Not surprisingly, the average age of marrying couples increased. But Mussolini never admitted that the Battle for Births was a failure. He decorated mothers of numerous children and organized propagandist celebrations.

Ironically, the Italian population did eventually achieve the desirable number of 60 million, after World War II, when family support policies were replaced by a free-market economy. This was so successful that Italy joined the ranks of G7, the group of seven big and most developed countries in the world. It became a major power, but not thanks to Mussolini.

But this is no happy ending. Since the 1970s, the tax burden imposed on unmarried Italians has come to exceed that of the Mussolini era. This time, they are being taxed not in the name of the new Roman Empire, but for solidarity and welfare state. The birth and marriage rates have declined accordingly. More young Italians live with their parents, and for a longer time, than ever, because after taxes are paid they are left with only pocket money. There are more than 60 million Italians today, but with the total fertility rate of 1.2 child per woman, it looks like a matter of a few decades for this number to fall back to the 1920s level.


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