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An Artificial Baby Boom

Mises Daily: Tuesday, March 22, 2005 by

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A popular platitude in the United States is that children "are our future." Armed with that comfortable phrase, politicians have endeavored to shower parents with myriad government favors, secured from the effort and initiative of others. These perks range from government-run school and day-care, to nutrition and "wellness" programs, to special health care and activity programs, all having the wonderful practical effect of making "our" children de-facto wards of the state.

And while Americans tend to pride themselves for being ahead of other nations when it comes to setting social and political trends, evidently, the politicians in Laviano, Italy, have surpassed us in this regard.

A recent Los Angeles Times article reported that the bureaucrats of that small southern Italian town have become alarmed by a declining birth rate. As a result, they’ve come up with an ingenious government solution. The answer? Simply reward people for having babies. Mayor Rocco Falivena and his associates have taken it upon themselves -- through the taxpayers, of course – to literally pay parents of newborns for having children. Over the course of five years, the government of Laviano will offer $14,000 to the parents of any newborn child. The Times reports that twenty people thus far have taken up the government on its quite generous offer, giving the idea of a nuclear family a whole new meaning.

While it may be easy to derive amusement from this example of redistributive government folly, it might be wise to pause for a moment, and consider that the US government has been doing the very same thing for years.

Those who have taken advantage of it, those who work in tax policy, and those who keep their eyes on the functional disequilibrium of the generic State are familiar with what is being cited. It is the "Earned Income Tax Credit" (EITC), a special dispensation from the Internal Revenue Service of the US government that showers financial rewards on poor people who have kids.

As opposed to a tax cut for parents who have children, which has the laudable effect of decreasing the burden of taxation for some citizens, but the pernicious effect of increasing the relative share of the tax burden for others, and reinforcing the fanciful notion that government has a prerogative to favor some behavior over others, the EITC actually gives moneyto people over and above that which they might have paid to the government in the first place.

Depending on his income, the EITC for which one could qualify ranges from $1, to nearly $5,000. In most cases, the EITC is collected by poor people who have no income tax liability whatsoever, and it is, in effect, a tax redistribution scheme perpetrated in their favor.

In an unpublished working paper, "Fertility Effects of the Earned Income Tax Credit" University of New Hampshire assistant professor of economics Reagan Baughman asserts that the effect of the EITC, especially since it was expanded in the 1990’s to allow for more redistribution of wealth, has had the practical effect of increasing birth-rates among non-white women. (All information below derived from published news articles on the topic and not her unreleased paper.)

"We do not find evidence that white women responded to the increases in the EITC, but we find evidence that non-white women had small but statistically significant increases in their fertility rates," writes Baughman.

Which just goes to show the behind-the-curve utopians in Italy that they could learn a thing or two from their friends in the United States!

The EITC rewards people for having children. For example, according to the IRS, if you are a single, childless, wage-earner, and the IRS terms your "taxable income" as ranging between $28,950 and $29,000, you get no money in the EITC. If you have one child, you can qualify for a "credit" of $218. If you have two children, the "credit" increases nearly five-fold, to $1,155. If a citizen’s tax liability is lower than his EITC, which it often is, then he is making a net profit off of another tax payer.

Thus, rather than taking the direct, Italian, route to encourage births in the United States, and possibly inspiring people to sound-off in protest, American politicians have developed a much more stealthy approach. They use the tax code, and call the payments for children "tax credits". The results, however, are the same. As Ms. Baughman’s study indicates, the attempt by the government to "help" poor people who are having trouble raising children has had the unanticipated contrary effect. It has incentivized and encouraged births among poor, non-white Americans.

It seems counterintuitive to think that a government intent on helping people could do more harm than good, but this is what happens when decision-making is taken out of the hands of free individuals and exercised by others. This is a fact of nature, and the reasons for it are numerous.

There is the matter of the subjective valuation of money. Only the person who earned the money, who actually employed his skills and energy and time to engage in a free exchange for payment, can properly determine how he will fulfill his desires and needs with the fruits of his labor.

This truism is closely tied to the fact that the problems people encounter are best understood by them, not someone who is not in their shoes. Having a child is the decision of the parents, not the state. The consequences of creating a new life, one wholly dependent on his parents and those who freely engage in charitable activity to support their efforts, are properly felt by the individual participants. They must make the calculations regarding income, expenses, hopes, and dreams, and it is an economic fact that they will determine the best course of action more often than people not associated with their concerns.

The further removed one gets from the individual desires and needs of the money-earner, the less efficient, less informed, any decisions will be. The redistribution of wealth causes a redirection in the flow of usable capital, from those activities that are determined by the wage earner to be most productive, to those that would not have been selected by that wage earner. By definition, this is a loss for the earner. When conducted on a large, national scale, a net loss in the productive wealth of everyone is thus incurred, and unintended consequences arise.

Thus, developing from a tax program that rewards childbirth, that warps the marketplace, and blurs economic reality for parents, we discover a perverse outcome: more children are born into poor families.

It is just the kind of thing the utopians in government wanted to try to alleviate, yet they have made it worse.

The ethics of having an abstract entity, ostensibly formed to protect our lives and our property, become a machine of redistribution based on majority-sanctioned theft are highly questionable. The practical outcome is pernicious. The trouble is that most people working in government will not recognize the fact that their actions are having such disastrous effects on the lives of others. Theirs is a religion. They worship at the altar of the state, and any empirical evidence that challenges their belief is discounted or overlooked.

Don’t look for Ms. Baughman’s study to be widely quoted by the members of the pop media, and don’t look for it to be held up for viewing by the volunteer army in the IRS. Moreover, don’t count on many of our Congressmen and Senators acknowledging what her report tells them. They are too busy concocting new means by which to seize the productive labor of Americans to try to relieve crises of their own making.

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 Gard Goldsmith lives in New Hampshire. elggrande@msn.com. See his archive and comment on this article on the blog.