On the Optimal Fiscal Treatment of Family Size

Should a benevolent social planner subsidize family size? Typically, contributions assuming exogenous fertility yield an affirmative answer, while those assuming endogenous fertility do not reach definite conclusions. We re-examine the endogenous fertility model, and find that when redistribution is accomplished mostly using non-income taxes, there is indeed a case for encouraging fertility, as long as poor families tend to have more children. Instead, when redistribution is mainly pursued using a non-linear income tax, the above rationale for child subsidization disappears. We finally argue that whether children are a tax asset or a tax liability depends, however, on all the policy instruments, and not only on the tax treatment of family size.