Nova workboard

a blog from young economists at Nova SBE

The invisible pronatalist impact of European States’ taxation

That is quite common to think about pronatalist measures as being the access to pregnancy and children’ first years medical services, subsidized education, family planning counseling or higher maternity leave period. In fact the majority of European states – those which belong to the old continent – have nowadays to deal with the problem of population ageing and therefore they have been using for the last decades tools as the mentioned above in order to avoid the worst scenarios as the collapse of social security services, the reduction of significant labor force and loss of competitiveness.

Those tools were already in practice over two decades ago when my parents decided to have their first child. And although they hadn’t though on having a son in order to got benefits, in fact the existence of those conditions might alter the composition of the family. 

The fact that children are an income source in a significant part of the world, especially across less developed countries, is not a new idea. Economic activities in these countries are mainly linked to agriculture and children are perfectly able to work on farms since the first years. What I never guessed is that having children might be also a real advantage in terms of family income in developed world.

Looking at OECD countries on Tax Wedge for Families With Children (http://www.oecd.org/ctp/tax-policy/taxingwages.htm#TW_D) there is a very significant difference of tax incidence between families with children and childless families. In some cases that gap may be even higher than 20% (e.g. Czech Republic, Luxembourg and Ireland). The difference arises due to the existence of fiscal benefits and cash transfers conceded to families with children. Although I know about the existence of these benefits I could not imagine that it represented so huge gaps between families and thus an important impact on tax revenues of the government. This means that in what concerns to family planning, the incentives of developed countries may be not so misaligned with the incentives of developing countries.

 

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Table 1 Tax Wedge by Family Type in 2012 (source: OECD)

 

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Table 2 Tax Wedge Overview for Portugal (source: OECD) 

What seem to be in fact misaligned are the goals of government in what concerns to these measures. In one hand governments want to decrease the accentuated ageing rates and therefore they offer fiscal benefits, but on the other hand those benefits may damage government budgets such that several times policy makers are not willing to go in.  Probably this is the reason why I realized European people don’t hear a lot about the real fiscal benefits of having babies: that’s not a government’s marketing failure but instead a way in the middle to keep pursuing the two objectives without damage any one.

 

 #86, Diogo Matos Mendes

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Author: studentnovasbe

Master student in Nova Sbe

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