Optimal Taxation in an Endogenous Fertility Model with Non-Cooperative Couples

This study examines the optimal tax structure in an endogenous fertility model with non-cooperative couples. In the model, both child quality and child quantity are suboptimal due to the non-cooperative behavior of couples. Moreover, we consider the external effects of children on society and center-based childcare services. In such a unified model, we characterize the formulae for optimal income tax rates, child tax/subsidy rates, and tax/subsidy rates on center-based childcare services. We find that income taxation, but not child subsidy, corrects the suboptimal low fertility level caused by the non-cooperative behavior of couples. A child tax tends to be optimal as the required tax revenue becomes higher or as the degree of external effects of children on society becomes smaller. Specifically, under the availability of lump-sum taxes and no externality of children on society, the child tax is desirable to alleviate the deadweight loss from income taxation. We also explore the condition under which a child subsidy is needed. The subsidy for external childcare services corrects the external effects of children on society, not the non-cooperative behavior of couples.