In addition to a full-scale invasion, a significant challenge for Ukraine today is the demographic cliff. According to the most pessimistic forecasts, by the middle of the century there may be less than 30 million people left.. The total fertility rate in Ukraine has fallen to a historical low of 0.9 children per woman, whereas for simple generation replacement this figure should be at least 2.1. We find ourselves in a situation where the state resembles a person who is trying to put out a fire in one room while simultaneously setting fire to the foundation of the house. While some departments are developing plans to stimulate the birth rate and the return of refugees, the Ministry of Finance is trying to squeeze as much taxes as possible from both employees and businesses. As the experience of other countries proves, the introduction of a flexible tax system for families with children stimulates the birth rate better and is more effective than social payments.
Lithuania - Zero PIT phenomenon.
In this context, the experience of post-socialist countries that have already passed the path from demographic shock to stabilization deserves attention.. In Lithuania, tax incentives are based on the idea of \u200b\u200bZero PIT. The mechanism works through the progressive growth of the tax-free minimum: with each subsequent child in the family, the amount of income on which income tax is not charged increases, leaving parents an increasingly larger share of their earnings. In practice, this creates one of the largest tax gaps in the world.. As of 2025, Lithuania maintains one of the world's highest tax gaps between singles and families. For a single worker, the share of taxes on income is 38.0%, while for a family with two children and one breadwinner this figure drops to 21.3%..
Working parents receive an additional 600–900 euros net monthly into the family budget compared to childless colleagues in similar positions. For highly qualified specialists, this benefit can exceed EUR 1,100, making legal employment in Lithuania the most cost-effective strategy for parents.
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For Ukraine, where the level of the shadow economy is about 40% of GDP, this approach is extremely relevant. Thanks to these reforms, the total reproduction rate in Lithuania increased from 1.55 in 2010 to 1.61 in 2019, reaching a peak of 1.70 in 2015. During this period of time, Lithuania showed significantly better results than the EU as a whole, where the average fertility rate remained at 1.50–1.53 for a long time.
“Polish style” instead of “baby packs”.
Another example for us could be Poland. If previously the country relied on direct payments, then with the introduction of the “Polish Way” reform in 2022, the emphasis shifted to tax benefits. Parents raising at least four children are completely exempt from paying income tax (PIT) on income up to PLN 85,528 (EUR 20,084) per year for each parent. In addition, the Polish model allows for joint taxation of spouses, which allows the couple to remain in the lower tax rate of 12% instead of 32%, saving up to 25,000 zlotys (approximately 5,800 euros) annually. This is complemented by the Active Father program introduced in October 2024, which pays up to PLN 1,500 (EUR 350) per month for a nanny or nursery if both parents are legally employed.
In addition to direct tax cuts, Poland in 2024–2025 introduced a unique incentive system that addresses the main problems of young families: housing and child care. The most radical step was the launch of the “Credit for Start” program, which replaced the “Safe Loan 2%”. The uniqueness of this program lies in its demographic progression: the interest rate on a housing loan decreases depending on the number of children in the family. For childless people it is 1.5%, for families with one child - 1%, with two - 0.5%, and for large families (3+ children) the mortgage rate is 0%.
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Another innovative instrument was popularly called Babciowe (“grandmother’s money”). Its essence is the legalization of the informal care sector. If parents return to legal work, the state pays 1,500 zlotys (approximately 350 euros) monthly, which they can officially transfer to a grandparent or other loved one for child care. This brings parents’ work out of the “shadow” (after all, this is a condition for receiving funds) and capitalizes the older generation.
Vision for Ukraine.
Ukrainian fiscal policy is moving in the opposite direction today. Instead of turning taxes into a tool for demographic reproduction, we see attempts to increase the tax burden and strengthen the repressive functions of fiscal authorities (access to bank secrecy and blocking bank accounts of entrepreneurs without a court decision), the National Revenue System and the latest initiatives of the Ministry of Finance.
The experience of neighbors, namely a personal income tax benefit with a complete zero tax for large families following the Polish model and a significant expansion of the tax-free minimum following the Lithuanian example, is worthy of study and adaptation in the Ukrainian context. Money should stay in the family automatically. This will create a direct link between legal work, paying taxes and the well-being of your own children..
Such practices will encourage the population to come out of the “shadow” and legalize their income. Because according to a comparative analysis of shadow economy schemes from CASE Ukraine, the Institute of Socio-Economic Transformation and the Economic Expert Platform, the greatest losses to the budget of Ukraine come from salaries in “envelopes” - 200–265 billion UAH per year.
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It is necessary to add a purely economic argument in favor of tax breaks for families. Families with two or more children objectively consume more - spend more on food, clothing, services, housing. In the long term, this means that the funds that the state releases through tax breaks are partially returned to the budget through VAT and other consumption taxes.. That is, demographic stimulation is not only social spending, but also an investment in future economic activity. More children today means a larger domestic market and more taxpayers tomorrow.
As long as the public policy philosophy reflected in the National Revenue Strategy focuses primarily on increasing fiscal pressure rather than on stimulating human capital development, it will be impossible to overcome the demographic winter.
However, no tax liberalization will work as long as we are trying to keep the solidarity pension system alive. Young people aged 18–30 are giving away part of their income now, realizing that by the time they retire, the system will finally collapse due to the lack of new generations of payers. Tax incentives should be complemented by a transition to an individual savings system. This is the only way we will allow citizens to be rich, so that Ukraine becomes young again.
The article was prepared by the Center for Socio-Economic Research “CASE Ukraine” with the support of the Askold and Dir Foundation, which is administered by ISAR International within the framework of the project “Strong Civil Society of Ukraine - the Engine of Reform and Democracy” with funding from Norway and Sweden. The contents of the report are the responsibility of CASE Ukraine and do not reflect the views of the governments of Norway and Sweden or ISAR International..
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