Family Taxation, Fertility, and Horizontal Equity: A Political Economy Perspective

This article intends to make a twofold contribution to the literature. First, it studies a political economy model of family taxation using a household economics approach. The winning policy depends on whether (1) the parents control their fertility and (2) they value their children. Second, it investigates the question whether the winning policy can achieve horizontal equity (HE) among families experiencing different fertility outcomes. It turns out that in what we regard as the most plausible setup (parents value their children, fertility is generally endogenous but some couples are constrained by reproductive limits), HE cannot be satisfied under plausible assumptions on what the policy maker can observe. It is argued that HE requires subsidies not for large families as such but for constrained families, which in some cases might be small. As it is difficult for a policy maker to ascertain whether a family is constrained or not, strong doubts are cast on the usefulness of HE as a guide for the design of family taxes.