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

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.