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Examining the effect of a child tax on fertility in a two-sector model

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  • Akihiko Kaneko

    (Waseda University)

Abstract

In this paper, we examine the efficacy of the child tax policy on the endogenous fertility rate in a two-sector model. We naturally assume that the investment goods sector is more capital intensive than the consumption goods sector. The endogenous fertility rate is determined by the cost of child-rearing and wage income. We find that the child tax has three effects (one direct effect and two indirect effects) on fertility. As a direct effect, the child tax increases the cost of child-rearing. The two indirect effects work in opposite directions: one raises the wage rate and the other lowers it. The total indirect effect of the child tax on wages is ambiguous, which is unique to the two-sector model. Additionally, the total effect of the child tax policy is analytically ambiguous, as in a one-sector model; however, our numerical example shows that the child tax is likely to reduce the fertility rate, unlike in the case of a one-sector model.

Suggested Citation

  • Akihiko Kaneko, 2025. "Examining the effect of a child tax on fertility in a two-sector model," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 72(1), pages 1-17, June.
    • Handle: RePEc:spr:inrvec:v:72:y:2025:i:1:d:10.1007_s12232-024-00478-3
    DOI: 10.1007/s12232-024-00478-3
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    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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