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A Reference Manual for Child Tax Benefits

Elaine Maag, Stephanie Rennane, C. Eugene Steuerle

Published: April 27, 2011
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Abstract

The individual income tax contains multiple provisions that favor families with children. They range from credits targeted towards low-income families to deductions that favor higher income families. Some provisions benefit a family by virtue of the family having children, others try to incentivize behavior such as work and going to school. This paper describes the various child-related provisions and shows the distribution of who benefits from the provisions. Benefits can be substantial. For example, a single parent with two children could receive a tax subsidy worth almost $9,000. The rules governing the provisions are complex and ripe for reform.

Read the entire report in PDF format.


Introduction

The individual income tax contains a number of provisions that adjust tax burdens or provide direct subsidies for the presence of children. Three types of arguments are made for these provisions. The oldest is that taxpayers should be taxed on ability to pay, and, therefore, it is appropriate to adjust for family size or for certain child care expenses. At any income level, for instance, a family of four has only half the per capita income of a family of two and, in a progressive tax system, at least some lower ability to pay. A second justification is simply to support children and their families, often in ways similar to welfare. Finally, some tax provisions attempt to encourage certain types of behavior; for instance, the earned income tax credit (EITC) was adopted partly as an incentive to work and an alternative to welfare.

When direct spending and tax provisions for children are counted together, the tax provisions account for a substantial share of the total and a very large portion of any new growth. Work by Isaacs and colleagues (2010) finds that in fiscal year 2009, tax credits and tax expenditures accounted for $132 billion of assistance to families with children. This number includes several significant recent changes in tax programs, such as the doubling of the child tax credit from $500 to $1,000 through legislation beginning in 2001. Along with other 2001 and 2003 tax cuts, this provision is not yet permanent.

Though sometimes considered universal, few child tax benefits truly extend to all children. What is more, confusion abounds. Low-, middle-, and high-income families qualify for different benefits. While some benefits are awarded equally per child, others decline in value for each successive child, and some are available only for a limited number of children in each family. In fact, although low-income families receive higher subsidies than higher-income families for their first and second children, the inverse is true for the third and fourth children (Mumford 2010). Some child-related activities (including child care and college attendance) receive specific subsidies, while others (such as after-school activities) do not.

To further complicate matters, the definition of a child is inconsistent among various tax subsidies. It varies by age, residency, citizenship status, and whether the taxpayer provides support for the child. Many of these provisions were enacted piecemeal, with different budget constraints contributing to the qualifications for eligibility.

Although the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and subsequent legislation greatly expanded some child-related benefits, they were set to revert to their pre-2001 levels at the close of 2010 until legislation would determine which of these provisions would be made permanent. A compromise at the end of 2010 between the president and Republicans in Congress extends these benefits through 2012.

This paper first describes the child-related tax provisions in 2011 law and some of the scheduled changes in those provisions. We group the provisions into two categories: those that are usually the same per child, and those that are designed to encourage a particular activity, such as work, in households with children. These categories are not mutually exclusive but simply provide a convenient classification system. We also describe some proposals put forth by legislators and academics for reforming various child-related provisions. Of course, in 2011 the federal government is spending more than 50 percent more than it is collecting in taxes, leading to budget pressures on all areas of spending, taxes, and tax subsidies and making the future of the entire tax code fairly uncertain.

End of excerpt. The entire report with footnotes is available in PDF format.