The most incisive guide to issues facing the American family today . . . An invaluable resource for anyone wishing to stay on the cutting edge of research on family trends.

-W. Bradford Wilcox
Associate Professor of Sociology, University of Virginia 

Labor-Income Taxes and Fertility

Bryce J. Christensen and Robert W. Patterson

Although they declined between 1957 and 1976, American fertility rates have since staged a modest increase, rising more than 17 percent between 1976 and 1996, the same period that European rates fell by more than 11 percent. What accounts for the greater fertility in the United States? According to economists at Washington University in St. Louis and the University of Wisconsin (Madison), increased tax rates on labor income in Europe, relative to the United States, has a lot to do with lower birth rates on the other side of the Atlantic.

To establish that claim, Rudolfo E. Manuelli and Ananth Seshadri build upon the statistical model of economic growth and fertility choice of Robert Barro and Gary Becker. When they add increased taxes on labor income into the model, they find that such tax hikes reduce human capital investment. Even though the marginal cost of children declines, the reduced wage rate also lowers consumption. So relative to consumption, the higher tax rate effectively increases the marginal cost of children relative to consumption “and consequently fertility declines.”

The authors then add to the Barro-Becker formulation increases in social security taxes and the redistribution of those higher tax revenues to individuals, ages 65 or more. In this calculation, they find “that more generous social security regimes financed by higher taxes on labor income have a negative net effect on fertility.”

Finally, to determine if their model can account for higher fertility in the United States, the economists apply to their model tax rates and social security transfers to match total-factor productivity output and social security data of the G7 nations from 1975 to 1995. Although conceding that their model is not perfect, they believe the fit between model and data is “surprisingly good.” “In all cases,” they find, “the model predicts the combination of observed tax increases and changes in the social security regime result in fewer children per person.”

Although the economists do not make the observation, their sophisticated statistical experiment clearly confirms that further increases in American fertility may not happen without reductions in tax rates on labor income, including Social Security and Medicare tax rates.

(Rodolfo E. Manuelli and Ananth Seshadri, “Explaining International Fertility Differences,” The Quarterly Journal of Economics 124 [May 2009]: 771-807.)