| April 4, 2013

Children Are Key to a Prosperous Economy

A topic that both liberal and conservative publications seem to be writing about with more frequency is the rapid aging of our population coupled with a declining birth rate, a trend that demographers have labeled “demographic winter.”

Countries such as Japan and Russia are already facing annual declines in population. In the United States, the epicenter of the problem is New England, where the age cohort over 65 is growing at a rate even faster than the rate at which the group under 18 is declining. According to Joel Kotkin and Harry Siegel (“Where Have All the Babies Gone?” Newsweek, Feb. 19, 2013), the ratio of retirees to those in the workforce, known as the dependency ratio, is likely to rise to 35 retirees for every 100 workers by 2050—twice today’s ratio.

So, why is this a problem?

In economic terms, this means fewer workers available to businesses and fewer customers to buy their goods and services.

A shrinking economy will also adversely impact the finances of government. The overall costs to government (federal, state, and local) increase approximately three-fold for people over the age of 65 compared to the cost of those under the age of 18. At the same time, the taxes paid by people over the age of 65 plummet by approximately two-thirds, mostly due to declines in payroll and income taxes.

The issue at hand is the fertility rate of American women (births per woman). There are many reasons for the significant decline, the most explicit being that women have been able to control their fertility for more than 40 years now via contraception and abortion. Another contributing factor is that, of women who are either of child-bearing age and/or have dependent children at home (ages 25 to 54), 75 percent are employed.

According to Kotkin and Siegel:

Even before the 2008 crash, childlessness among American women ages 40 to 44 of all races and ethnicities had steadily increased for a decade, with the proportion of childless women doubling from 10 percent in 1980 to 20 percent today. But the negative trend has accelerated since the Great Recession began. In 2007 the fertility rate in America was 2.12 and had been holding nearly steady for decades at about replacement rate—the highest level of any advanced country. In just half a decade since, the rate has dropped to 1.9, the lowest since 1920 (when reliable records began being kept), and just half of the peak rate in 1957, in the midst of the baby boom, according to the Pew Research Center.

Children are crucial for a prosperous society. “When you stop having the humans, your life is limited and your prosperity is doomed,” says American Enterprise Institute president Arthur Brooks.

Given this reality, what then should Oklahoma policymakers do?

Having children is a major expense, so policymakers should first find ways to help lower the cost of children. Creating a family-friendly tax code is a necessary first step. The OCPA-Laffer plan to get rid of the individual income tax altogether would certainly fit the bill. Short of that, Oklahoma should eradicate its marriage penalty and also expand its child tax credit for households with a stay-at-home spouse.

OCPA research fellow Wendy P. Warcholik (Ph.D., George Mason University) formerly served as an economist at the U.S. Department of Commerce’s Bureau of Economic Analysis, and was the chief forecasting economist for the Commonwealth of Virginia’s Department of Medical Assistance Services. She is a co-creator (with J. Scott Moody) of the Tax Foundation’s popular “State Business Tax Climate Index.”

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