The Strange Relationship Between Taxation and Time Spent with Children

Today, the key issue in taxation concerns the implications of reductions in the tax burden, which in some countries has reached excessively high levels. One of the most recurring arguments, both in policy and academic debates, is that a reduction in tax rates would cause an increase in the volume of hours worked in general, and in particular an increase in the number of hours worked by women, who, according to empirical evidence, appear to be more sensitive to changes in net wages.

A significant increase in female participation rates would require changes in the way child care is presently organized, in particular by increasing the reliance on care services performed outside the household, such as nursery schools and kindergartens. Hence the need to increase the supply of day care centers (still too few and heterogeneous in Italy) that ensure high-quality standards in child care. In this regard, recent literature has shown, for example, that the quality of rearing in the early stages of one's life can have a significant impact on their lives as adults, even influencing their future productivity on the labor market (see for example the contributions by Chetty and co-authors). From an empirical point of view, recent contributions have shown that substituting the time spent in maternal care with services offered by other care providers has either negative on null effects on children's abilities. However, if the alternative to parental care is performed by professional providers such as nursery schools, the effects are positive, especially for kids coming from disadvantaged families.

In our theoretical contribution (Casarico and Sommacal, 2018, "Taxation and parental time allocation under different assumptions on altruism", International Tax and Public Finance) we study the impact of a tax reduction on the allocation of parental time. First of all, parents must choose how to allocate their own time between alternative uses: work and leisure. They also need to choose between quality time spent with children (i.e. active interaction that involves playing with and/or reading to their children, something which can contribute to the development of their human capital) and time spent in the presence of children (i.e. passive interaction limited to mere supervision, which therefore plausibly has a lesser or no impact on the child's human capital). Furthermore, the term allocation of time refers to the care mix given to children: quality time and supervision time, provided by parents, and hours of care provided by formal actors outside the family, such as nursery schools.

If tax rates are cut, does the resulting increase in work hours lead to a full substitution of the quality time spent with children with time spent in care outside the family? The answer to this question depends on the motivations behind child care decisions. If parents have a form of far-sighted altruism and if the tax reduction is perceived as permanent, then the optimal choice of parents could be to increase the labor supply without reducing the quality time spent with their children, while replacing standard time with care services outside the family. The intuitive explanation for these results is that when parents make their decisions, they realize that, following a permanent reduction in taxation, their children will also find themselves in the future in the position to sell additional hours on the labor market: a high human capital, thanks to quality time spent with parents and child care workers, will therefore be particularly useful when children reach working age.

This result, that an increase in the labor supply generated by a tax cut does not necessarily go hand in hand with a reduction in quality time spent with children, seems to be in line with the scant empirical evidence available that specifically looks at the impact of taxation on parental time allocation (Gelber and Mitchell, 2012). It also suggests that tax cuts could generate a double dividend, on today's labor supply, and on tomorrow's human capital.