As different generations live together, they transfer valuable resources to each other. Newborns are delivered into this world – not by storks but by their mothers; more on this later. Then, it takes on average twenty-five years to turn babies into resource-productive adults. But how many resources does this childrearing process really require? And who pays for it? These are questions of primordial importance as they pertain to demographic renewal and fiscal sustainability – to how societies reproduce over time.
Accounting for the invisible transfer cost of raising children
Parents use a combination of three channels to rear children: (1) staying at home to care for their child (giving “time”), (2) buying market goods and services (giving “money”), or (3) working and paying higher net public transfers (“taxes”) that will finance state activities, including policies for children and families. But importantly, these three channels are not equally visible in statistics. Parents do not keep accounts of how much time and money they spend, but taxes and social security contributions are much better recorded.
In ’Taxing Reproduction’, we argue that this asymmetric statistical visibility matters a great deal, as it hides an important further asymmetry in who shoulders the cost of reproducing society. Better measuring the distributional impact of the status quo allows debates about the social and private costs of demographic renewal to be held on more complete and more explicit terms. We use NTA and NTTA methods for twelve EU countries to measure not just all net public transfers (the “state”) but, crucially, also to value the less visible flows of private time and money.
Shining a wider light changes the picture
A fuller accounting for intergenerational transfers truly shifts perspectives, and not just marginally. We find that parents in Europe contribute somewhat fewer public transfers than non-parents. But, away from the statistical limelight, parents additionally provide large transfers of time and money to their own children. This might seem unremarkable. Parents are, after all, the primary caretakers.
But these hidden extra transfers are so large that they radically change the entire picture. Over the working life, parents in Europe contribute on average about one-quarter fewer net taxes than non-parents. But when we then also value all flows of private time and money, parents turn out to contribute over two-and-a-half times more resources overall.
Why do such large asymmetries in cost-sharing matter? Rearing children is not just a personal lifestyle choice. Children are also public goods. As they grow up to become taxpayers, social security contributors, caregivers and parents in their turn, children will finance future public goods and welfare states. All of this will then also benefit non-parents. Hence childrearing creates positive externalities. To be sure, another part of parental transfers resembles pure consumption. Private transfers may also reduce intergenerational mobility. So why should parents be compensated for something they presumably freely engaged in?
Debunking another “stork theory”
A key reason is that not counting the positive externalities of a good generally leads to socially suboptimal amounts of that good being produced. If societies do not fully value the transfer cost of childrearing, they risk producing too few productive adults. This puts the intergenerational social contract under severe strain. Ultimately, labour markets and welfare states could not continue to function well without the human capabilities of subsequent generations.
Barring immigration on a politically wholly unrealistic scale, the renewal of societies, economies, and welfare states crucially depends on both the size (“quantity”) and the productivity and capabilities (“quality”) of successive generations – on what mainly parents do. This is why childrearing acquires the deeper status of producing, also, a socially necessary public good.
Today, policy practices do not fully take into account how the human and fiscal resources welfare states and labour markets tap into were created in the first place. Societies thus adhere to another “stork theory” that needs debunking. Just as newborn infants are not actually delivered by storks, resource-productive adults do not just drop fully formed out of the sky. Rather, they are delivered to society after a further twenty-five years of child-rearing, financed to some degree by all taxpayers but to a larger degree by their own parents.
Ageing Europe taxes its own reproduction
Many activities with positive externalities, such as charitable donations, private savings or investments in green technologies, are awarded tax credits. But when parents produce positive externalities, instead of receiving tax credits, they shoulder a significant extra resource contribution load. We calculate that the “tax” rates implicitly imposed thereby on child-rearing are much higher than the value-added tax rates in place in Europe on consumption goods such as food, clothes and electronics. Is this a good policy?
Most people today agree that there is something quite wrongheaded about two other widespread societal (non-)valuation practices. Claudia Goldin was awarded the 2023 Economics Nobel Prize for her research on gender and “motherhood penalties.” Nancy Folbre has shown persistent ”carer penalties.” Folbre put it memorably: when societies take prisoners of love, it does not benefit them in the long run. This is an unsustainable policy.
Toward more complete human capability-boosting policies
Better accounting for invisible value production by families substantially changes how we understand, let alone address, the same policy question. When parents contribute over two-and-a-half times more resources than non-parents, this captures the sheer magnitude of the hidden asymmetry in cost-sharing. The large size of the still-privatised cost of child-rearing will affect parenting decisions and will lower fertility levels. This raises important questions about current policy practices in “social investment Europe".
Across Europe, parents have consistently fewer children than they would like. In addition, European societies have long grappled with fertility rates well below replacement levels, high or still-increasing levels of childlessness, and larger, longer-living older populations. Yet despite these rising demographic tensions, societies unwittingly tax rather than subsidize their own reproduction. In the long run, this is an unsustainable policy.
To secure sustainable future foundations and avoid becoming a continent of gerontocracies, Europe needs to make its currently elderly-oriented welfare states more intergenerationally balanced and much more human capital-oriented. Notwithstanding its name, the “social investment paradigm” needs to design yet more extensive policy models to better assist, value and incentivize the work of parents, carers and educators – those who nurture the human capabilities that sustain our societies.
References
Bonomi Bezzo, F., Raitano, M., Vanhuysse, P. (2023), ‘Beyond human capital: how does parents’ direct influence on their sons’ earnings vary across eight OECD countries?,’ Oxford Economic Papers https://doi.org/10.1093/oep/gpad007
Gál R.I., Vanhuysse P. &- Vargha L. (2018), Pro-elderly welfare states within child-oriented societies. Journal of European Public Policy 25(6): 944–58.
Vanhuysse P. & Gál R.I. (2023), ‘Intergenerational Resource Transfers in the Context of Welfare States,’ in: Daly M., Pfau-Effinger B., Gilbert N., Besharov D., editors. The Oxford Handbook of Family Policy: A Life-Course Perspective. Oxford: Oxford University Press; 2023. p. 1015–33.
Vanhuysse, P., Medgyesi, M. & Gal R.I (2023), Taxing reproduction: the full transfer cost of rearing children in Europe, Royal Society Open Science, https://dx.doi.org/10.1098/rsos.230759
Vanhuysse, P., Medgyesi, M. & Gál, R.I (2021), Welfare States as Lifecycle Redistribution Machines, PLOS ONE 16(8):e0255760 https://doi.org/10.1371/journal.pone.0255760