The Fiscal Return to Childcare Policies
Abstract
Childcare policies improve the compatibility of family and career and therefore increase maternal life-cycle earnings and tax payments. How much should childcare be subsidized due to this dynamic fiscal externality? To provide quantitative answers, we estimate a dynamic discrete choice model of female labour supply and childcare decision on German panel data. We account for a large amount of heterogeneity: beyond heterogeneous preferences, education levels, wages, and availability of informal child care, we also account for heterogeneity in fertility such as timing of birth(s) and number of children. In addition, we incorporate regional differences in public childcare availability and subsidies. We then evaluate the universal childcare program in Germany through the lens of this model. We find that a recent major expansion of publicly provided childcare supply (almost) fully paid for itself through the dynamic effects on maternal tax payments. Increasing subsidies further from the current generous levels (approx. 80%), however, would only recover 6% of its costs because it would primarily benefit households that are infra-marginal in their childcare and labour supply decision. We further explore the fiscal resturns of increasing the number of daycare centers to reduce commuting distances for parents.
