Familienleistungsausgleich, Lastenausgleich, Familienpolitik, Welt, Family benefits, Property loss compensation, Family policy, World

Wolfgang Meister

Wolfgang Ochel

English

Research Papers in Economics

TAX PRIVILEGES
FOR FAMILIES IN
AN INTERNATIONAL
COMPARISON
WOLFGANG MEISTER
AND WOLFGANG OCHEL
The problems associated with
the ageing of the population
have led to a call for family poli-
cies designed to raise fertility. If
such policies hope to contribute
to increasing the birth rate, they must consider the
fact that many women have set their sights on
working (Atkinson 1999).
It can be assumed that a large proportion of
women would like to have children. And yet,
women often value a professional activity so high-
ly that they put off their desire
for children. To ensure the com-
patibility of job and family, a
whole series of conditions must
be satisfied. Women must be
released from working at the
birth of a child. Moreover, suffi-
cient childcare facilities must be
available. The world of work
must be designed to accommo-
date families.And finally,the net
income of families with children
must be sufficiently high for
them to afford external child-
care facilities, unless these facili-
ties are financed from the public
purse (Fenge and Ochel 2001).
Child allowance or tax exemp-
tions for children may be grant-
ed in order to increase the net
income of such families.And tax
splitting for spouses benefits
couples with children indirectly.
But families with children are
also eligible for preferential tax
treatment in other ways.The fol-
lowing paper compares the tax
privileges offered to families in
an international comparison on the basis of data
calculated by the OECD in 2002.
The OECD calculations are based on a representa-
tive taxpayer.This is an employee earning an aver-
age wage by working full-time in the manufactur-
ing sector, i.e. an average production worker. The
CESifo DICE Report 1/2003 42
Database
Figure 1
Table 1
Tax privileges for single parents with two children
a), 2000
Additional net income
with two children
b)
Net income
without children
b)
US$ US$ %
Austria 11 173 4 593 41.1
Belgium 11 742 3 850 32.8
Denmark 13 801 6 062 43.9
Finland 14 305 3 680 25.7
France 9 943 1 311 13.2
Germany 12 650 3 981 31.4
Greece 5 458 545 10.0
Ireland 12 079 2 802 23.2
Italy 9 609 2 740 28.5
Netherlands 11 951 3 524 29.5
Portugal 4 044 488 12.1
Spain 8 080 546 6.8
Sweden 11 604 2 226 19.2
United Kingdom 14 968 6 323 42.2
Norway 15 217 4 799 31.5
Switzerland 19 606 4 022 20.5
Czech Republic 2 407 1 080 44.9
Hungary 1 586 646 40.7
Poland 2 425 200 8.2
Australia 12 152 4 387 36.1
Canada 12 576 3 923 31.2
Japan 22 551 825 3.7
New Zealand 8 752 2 128 24.3
United States 15 759 4 516 28.7
a) Employees with a gross income of 66 2/3% of an average production worker’s
    wage.
b) Net income = gross wage – income tax – employee contributions to social in-
     surance + transfer payments.
     Income data converted to US$ at average daily exchange rates.
Source: OECD, Taxing Wages 2000–2001, Paris 2002; calculations by the Ifo
Institute.CESifo DICE Report 1/2003 43
Database
calculation looks at his net income (= net wages
– income tax – employee contributions to social
insurance + transfer payments).The net income of
single parents and families with two children is
compared with that of singles and families without
children.
All OECD countries grant tax privileges to single
parents and families with children (the only excep-
tion is New Zealand as regards families with chil-
dren). Their net income is higher than that of sin-
gles or families with no children. It is striking that
single parents get more favourable treatment than
families with children. The differences are consid-
erable in many countries (cf. Fig. 1). The preferen-
tial treatment given to single parents may be due to
the fact that they have only one income which they
can sustain only by making use
of external childcare facilities.
The benefits granted to single
parents with two children are
considerable in many countries.
Their net income exceeds that of
singles without children by more
than 40 percent in the Czech
Republic, Denmark, Great
Britain, Austria and Hungary.
The difference is less than
10 percent of net income only in
Japan, Spain and Poland (cf.
Table 1).
The difference in the net income
of families depending on the
number of children is – as
already mentioned – much less.
In no country does the net
income of families with two chil-
dren exceed that of families
without children by more than
20 percent. Hungary, Austria,
Belgium, the Czech Republic
and Germany are among the
countries offering the most gen-
erous tax benefits to families
with children (cf.Table 2).
Hitherto, the net income of fam-
ilies with two children was com-
pared with that of families with
no children. However, there are
countries where tax benefits do
depend on the number of chil-
dren. One such example is France, which offers
scarcely any benefit for the first child but consider-
ably privileges the third one. In France, the system
of the family quotient applies to a part of the tax
arrangements. In a splitting procedure, the taxable
income is divided by a number which depends on
how many children there are in the family:1 for the
husband, 1 for the wife, 1/2 each for the first and
second child, 1 for the third child etc. So the
income of a married couple with three children is
divided by four. The tax payable on this income is
then in turn multiplied by four.This procedure thus
avoids the burdens due to the tax progression.
Many children make economic sense,especially for
families on high incomes.(This system may be seen
as an attempt to promote higher birth rates among
socially more desirable groups.)
Table 2
Tax privileges for married couples with two children
a), 2000
Additional net income with two
children
b)
Net income
without children
b)
US$ US$ %
Austria 21 348 3 995 18.7
Belgium 22 138 3 405 15.4
Denmark 27 603 2 351 8.5
Finland 27 575 2 755 10.0
France 19 568 1 676 8.6
Germany 25 300 3 203 12.7
Greece 11 399 887 7.8
Ireland 23 108 974 4.2
Italy 19 170 942 4.9
Netherlands 23 505 1 616 6.9
Portugal 7 883 540 6.9
Spain 15 579 299 1.9
Sweden 22 857 2 226 9.7
United Kingdom 29 936 1 970 6.6
Norway 30 242 2 675 8.8
Switzerland 39 107 3 760 9.6
Czech Republic 4 790 694 14.5
Hungary 3 123 587 18.8
Poland 4 851 200 4.1
Australia 24 034 1 048 4.4
Canada 24 678 1 118 4.5
Japan 45 015 878 2.0
New Zealand 17 504 0 0.0
United States 31 283 2 125 6.8
a) Two employees with gross incomes of 100% and 33 1/3% of an average
    production worker’s wage
b) Net income = gross wage – income tax – employee contributions to social in-
     surance + transfer payments
     Income data converted to US$ at average daily exchange rates.
Source: OECD, Taxing Wages 2000–2001, Paris 2002; calculations by the Ifo
Institute.CESifo DICE Report 1/2003 44
Database
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.CESifo DICE Report 1/2003 45
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Despite this graduated benefits scheme, a family
with an average income and three children is not
treated more favourably in France than in
Germany. In France, their net income increases by
16.8 percent and in Germany by 19.3 percent com-
pared with that of families without children. For
families with only one child, however, the differ-
ences in benefits are considerably larger, as France
hardly privileges the first child at all (cf.Fig.2).The
French argue that the first child comes along with-
out too much fiscal reflection by the parents.
However, a different picture emerges if we exam-
ine the additional state privileges accorded, via
child allowance and tax savings, to families on the
birth of an additional child if they already have one
or two children. For the previously examined dual-
income married couple where one spouse earns the
average wage and the other a third of it, the
increase in net income per year due to a second
child worked out at 1,600 US$ (corresponding to
5.9 percent) in Germany in 2000,whereas in France
the figure was 1,472 US$ (corresponding to 7.4 per-
cent). At the birth of a third child, the relative
increase in income was also 5.9 percent in
Germany, whereas it increased slightly to 7.5 per-
cent in France (cf. Fig. 2 and Table 3).
The French family quotient mentioned above does
not lead only to increased privileges as the number
of children increases, but as a rule also to higher
benefits with rising incomes. If we consider the dif-
ference in net income between a married couple
with two children and a five-member family in
France, we see that the latter does better the high-
er their joint gross income is. If the second spouse
earns two thirds the average wage, the additional
benefit was 7.7 percent of net earnings (corre-
sponding to 1,987 US$ per year) in France, where-
as it was only 4.8 percent (1,604 US$) in Germany.
As shown in Table 3, the additional benefit for the
third child in Germany hardly depends at all on the
income level of the second earner,whereas there is
a great difference in France.
If we consider incomes which are significantly
higher than average earnings, the splitting factor in
conjunction with a progressive tax function further
increases tax relief in France (at least in terms of
the absolute amount). There is also a slight pro-
gression effect in Germany, apparent in the first
instance in calculating the solidarity supplement.
To this must be added the child exemption which
replaces the flat-rate child allowance for very high
earners: it is included in the tax assessment and
leads to continuously increasing tax relief in the
progression zone.
References
Atkinson, J. (1999), “Employment Options and Labour Market
Participation”, in: European Foundation for the Improvement of
Living and Working Conditions and Infratest Burke Sozialfor-
schung (eds), Employment Options of the Future, First Analyses,
Dublin.
Fenge, R. and W. Ochel (2001),“Die Vereinbarkeit von Familie und
Beruf:der Schlüssel für eine kinderreiche Gesellschaft”,ifo Schnell-
dienst 54 (12), 17–29.
OECD (2002), Taxing Wages 2000–2001, Paris.
Figure 2

Employment Options and Labour Market Participation”, in: European Foundation for the Improvement of Living and Working Conditions and Infratest Burke Sozialforschung (eds), Employment Options of the Future, First Analyses,

Taxing Wages 2000–2001,

Tax Privileges for Families in an International Comparison

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Tax Privileges for Families in an International Comparison

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