The voices of Tax Policy Center's researchers and staff
In this year’s presidential campaign, Hillary Clinton’s proposal to double the child tax credit and Donald Trump’s plan replace the dependent exemption with a higher standard deduction have both helped focus attention on tax treatment of families.
Interestingly, both progressives and conservatives oppose extending preferences to children in middle and higher income families. Progressives prefer to “spend” the money on those with less income, and conservatives, especially supply-siders, believe the funds would be better used to reduce marginal tax rates.
But they confuse the two purposes of providing benefits to children. The first is a classic social welfare argument that revolves around spending to subsidize one thing (in this case, the needs of children) at the cost of higher taxes or lower subsidies for another. This is especially powerful when the benefit goes to those with the greatest needs: Concentrating a greater share of spending on lower-income people results in the greatest reduction in poverty.
But there is second goal of adjusting tax burdens for children—and it is based on a tradition that goes back at least to Aristotle: to treat equals equally under the law. Economists call it horizontal equity, but I prefer the term “equal justice.” In the tax system, this means taxing equally those with an equal ability to pay. And it should apply among all households, rich and poor alike.
This is especially important when you think about households with and without children. In almost all transfer and tax systems, benefits are adjusted for household size. For instance, the federal poverty level is about $12,000 for a one-person household and about $4,000 higher for each additional person, or about $24,000 for a four-person household. To put it another way, the guideline suggests that a $24,000 four-person family can live at the same poverty level of consumption as a $12,000 single person.
In the past, the tax system used the dependent exemption to provide equivalence for families with children. But the exemption waned in importance as per capita income rose much faster than the exemption, which for a long time was not indexed and even now is indexed only for inflation. As a result, the relative burden on households with children rose. After I revealed this in the early 1980s, President Reagan supported an increase the exemption. To believe that the current exemption of about $4,000 is the right number, one would have to believe that a couple with no children and $52,000 of income lived an equivalent lifestyle as one with $60,000 of income and two children.
More recently, Congress and presidents Bill Clinton and George W. Bush expanded the child credit in lieu of increasing the dependent exemption. That the credit has been made partially refundable and extends fairly high up the income scale implies that those expansions served both goals of spending on those in need and establishing tax parity among families of different sizes. The current exemption of about $4,000 is worth $1,000 to a family that pays a marginal tax rate of 25 percent, so the current credit of $1,000 plus the exemption grants that family about $2,000 per child in total benefits.
Whatever the right balance between the social welfare and equal justice approaches, most voters judge government on whether they think they are being treated fairly. But if children are both expensive to support and reduce a household’s ability to pay taxes, and if a welfare system separately provides supports for households with low incomes, then shouldn’t adjustment for children put explicitly in the tax system apply to most or all households? It is an interesting and important question and one for which at least politics has led elected officials to answer, “Yes.”
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