18
Then it has to be decided how to finance the deficit of the social insurance scheme in case
of reducing the contribution burden of contributors with children. As already argued13 the
adequate way to finance this deficit is from tax revenue and not by earnings-related
contributions up to a ceiling - as it is done at present in health and long-term care insurance in
Germany because of contribution-free insurance of non-working spouse and children. There
are distributive arguments against this (because expenditure for family policy would not be
financed according to the ability to pay but only based on income from labour up to a ceiling)
as well as arguments regarding the effect on the labour market: Financing family policy by
earnings-related contributions increases labour costs which negatively affects labour demand
and may increase unemployment.14
13 Either on the base of utility of raising children for the society in general or regarding the lack in
transparency and goal-oriented targeting of measures of family policy in case of trying to
compensate externalities in several different branches of social insurance, other branches for
providing social security etc.
14 This is discussed in Schmahl (1998).