Fertility and the Personal Exemption: Comment

1616 Standard economic theory tells us that the demand for children is influenced by the cost of raising children. Holding other things constant, a decrease in the cost of raising children should lead to an increase in the demand for children. As shown in Figure 1, the average value of the US child tax subsidy adjusted for inflation has increased from under $850 in 1980 to more than $2,000 in 2005. The USDA estimates that annual expenditures on children range from $7,580 to $16,970 depending on the age of the child and household income (Mark Lino 2007); thus, the $1,150 real increase in child tax benefits can be thought of as a 7 to 15 percent discount on the cost of raising children. How much of an effect (if any) did this reduction in the cost of raising children have on fertility? Leslie A. Whittington, James Alm, and H. Elizabeth Peters (1990) were the first to seriously estimate the responsiveness of fertility to child tax benefit changes. Their analysis of time series data from 1913 to 1984 suggests that the US fertility rate is very responsive to child tax benefits. They estimate that a $100 increase (in 2005 dollars) in the tax value of the personal exemption would increase the general fertility rate by 2.1 to 4.2 births (a 3.2 to 6.5 percent increase).2 While the sign of the estimated effect is not unexpected, the strong and robust magnitude of the Whittington, Alm, and Peters (1990) estimate is surprising. If a $100 increase in annual child tax benefits could increase fertility by 3.2 to 6.5 percent, should we have expected a 32 to 65 percent increase in the US fertility rate in response to the $1,000 Child Tax Credit, holding all other factors constant? Since Whittington, Alm, and Peters (1990), a handful of empirical studies have estimated a fertility response from changes in child tax benefits or other child subsidies. One set of papers uses similar aggregate time-series or pooled time-series