Income Risk, the Tax‐benefit System and the Demand for Children

Clive D. Fraser

Economica, 2001, vol. 68, issue 269, 105-126

Abstract: Because children represent an irreversible commitment, parents might hedge against higher income risk by having fewer children. We show that, under plausible assumptions, recent increases in income risk might have reduced prudent parents’ desired fertility. Responses to this via the tax‐benefit system are considered. Introducing an expected revenue‐neutral transfer‐cum‐child‐benefit system under proportional taxation, which lets the government share the household’s income risk, increases desired fertility for parents who would choose to have small families in this system’s absence. Pound for pound, the targeted child benefit enhances fertility more than the lump‐sum transfer.

Date: 2001
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