The Transfer Cost of Parenthood

Fertility effects of social policy are usually modelled either in consumption models (people have children because they like them) or in investment models (people have children in order to use their labour, care and support). The tests of such models usually do find fertility responses to social policy: more robust in family benefits and less robust in pensions. However, the effects are relatively weak. Instead, we use a taxation framework: child is a positive externality, i.e. equivalent to a taxed commodity. The taxation framework captures two effects in one unified framework: a fertility response and redistribution by number of children. The effects depend on price elasticities: if demand for children is elastic with respect to the net cost of child raising the fertility response will be strong and the taxes collected (and the resulting redistribution by number of children) will be small; if instead demand is inelastic, the fertility response will be moderate and redistribution from parents to nonparents will be strong (heavy taxes will be collected). On a sample of 14 EU countries (using data from EU-SILC and the National Transfers Accounts database) including five of the six largest member states, representing 70% of the EU population and covering all welfare regimes we show that empirically the net redistribution is from parents to non-parents.