The intriguing relationship between taxation policies and fertility rates in South Korea – significant implications for policymakers to consider.
South Korea has experienced the steepest decline in fertility rates of any industrialised nation, from over 6 children per woman in 1950, and then a drop to less than 1 child per woman by 2023. But with falling fertility rates worrying governments around the world, from the United Kingdom to the United Arab Emirates, are there any lessons that can be learnt from studying South Korea's taxation policies over the last half century? New research from Brunel University London explored the impact that tax hikes have on people's decisions to have children and on fertility rates.
In October 2024, figures from the Office for National Statistics showed that 2023 saw the lowest fertility rate in England and Wales since 1938. Only 591,072 babies were born, which was a fall of more than 14,000 on the previous year. While the number of births fell to a record low, the number of women of child-bearing age was at its highest ever at 12 million.
In this collaborative new study, published in Research in Economics, Brunel’s Prof Francesco Moscone, a health economics expert, and Dr Joan Madia, a researcher from the University of Oxford, explored South Korea’s major tax reforms from the mid-1970s to investigate if heightened tax burdens might have contributed to reduced fertility rates over the subsequent decades. The international research team included also included academics from the Ca’ Foscari University of Venice and South Korea’s KDI School of Public Policy and Management.
“The role of taxation policies on fertility has been somewhat overlooked, and our study set out to highlight this less-explored aspect,” explained Prof Moscone. “Taxes don’t just impact our bank accounts, they can also shape our long-term economic planning and decisions regarding family expansion,” he added. “As the tax burden rises, the cost of raising children increases, which can deter people from having more children.”
Using data from the World Bank, the team of researchers studied South Korea’s taxation figures from the 1960s onwards. “In the 1960s and early 1970s, South Korea had a relatively low tax burden, with tax revenues comprising only around 10-15% of income,” explained Prof Moscone. “However, significant tax reforms took place between 1974 and 1976 under the Tax System Improvement Act, which increased taxation to 20%.”
Dr Madia explained the findings.“The fertility rate in South Korea has fallen from 6 in 1950 to less than 1 in 2023, and the observed changes in fertility over time seem to align with the shifts in South Korea’s tax policies. The reduction in the negative effect in the mid-1990s and 2000s coincides with the major tax reforms undertaken in 1994 and 1995 which aimed to establish a more advanced tax system with lower rates and a broader base, similar to the U.S. tax reform in 1986,” she added. “By lowering individual income tax rates, adjusting tax brackets, and reducing corporate tax rates, these reforms likely provided relief in tax pressure on individuals and families and could explain the diminished negative impact on fertility during the mid-1990s and 2000s.”
The Oxford academic believes that the research provides compelling evidence that higher tax burdens after the mid-1970s tax reforms led to substantial reductions in fertility rates in South Korea. “Our research suggests that taxation can be an effective policy tool for influencing population dynamics and demographic trends and indicates that taxes targeting families and reducing child affordability are most likely to affect fertility,” he said.
While taxation is crucial for funding social security and welfare programmes that benefit the population, Prof Moscone reinforced the potential consequences and risks of high tax rates. “Taxation represents an important factor that may influence fertility by reducing disposable income available to families,” he explained.
“A consistently low fertility rate can cause economic and social challenges, and an accelerated ageing population results in shrinking workforces. A low working-age population puts pressure on social security, and this results in a lack of innovation while obstructing economic growth.”
Because of the risks associated with a country’s rapid fertility decline, Prof Moscone emphasised the important implications of policies. “Policymakers should be cautious about large tax hikes, and it is imperative that they apply thorough and thoughtful policy considerations.
“When modifying tax systems and policies related to family resources and child affordability, policymakers should consider the potential demographic impacts of taxation policies and monitor demographic impacts closely.”
Dr Madia highlighted the benefits of scheduling tax reforms over a multi-year period to provide much-needed predictability. “By offering businesses and investors a clear roadmap, governments reduce uncertainty, fostering stability, innovation and investment,” she said. “When fiscal stability is ensured, firms are more likely to commit to long-term projects, hire workers and boost economic growth.”
Today, Korean policymakers face long-term demographic pressures, which the researchers believe is partly due to the country’s past policy choices. “Periods of high fiscal volatility, characterised by unpredictable government spending, unstable fiscal policies and overall economic instability, have consistently preceded declines in economic growth," explained Moscone. "Stable economic growth generally improves conditions favourable to reproduction and fiscal uncertainty diminishes this positive effect, leading to negative consequences on fertility rates. This pattern is particularly evident in countries like the UK and Italy.
“Embracing more family-friendly tax policies and options like child tax credits could form part of a broader strategy to maintain a healthy fertility rate — which may help to counteract low fertility and support family formation,” explained Prof Moscone.
‘Fertility decline and tax revenues in South Korea’, by Joan E Madia, Francesco Moscone, Asieh Hosseini Tabaghdehi, Jong-Chol An and Changkeun Lee, is published in Research in Economics.
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Nadine Palmer,
Media Relations
+44 (0)1895 267090
nadine.palmer@brunel.ac.uk