Who Will Pay for Hillary Clinton's Tax-Code Social Engineering?

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Being a parent isn't easy. From diaper changes to afterschool activities to helping with homework, parenting is a lot of work. And then there's the cost. The Department of Agriculture estimates that it will cost a middle-income family $240,350 to raise a child born in 2013, not including the cost of college. Being a parent is taxing. So it's ironic that the only way parents seem to get a break is on their taxes.

In 2016, a hypothetical married couple with no kids earning $50,000 in wages and claiming the standard deduction will pay $3468 in federal income tax. If that same couple had two children, their federal income tax bill would fall to $253, a $3215 tax savings. The tax savings is largely due to the child tax credit and the personal exemption that a taxpayer claims for each dependent in their house. The tax code is family friendly.

The policy that makes the biggest difference is the child tax credit. Created as a nonrefundable $500 credit in 1997 by President Bill Clinton and a Republican-led Congress, the child tax credit was later doubled to $1,000 by President George W. Bush and Congressional Republicans, who also made the credit refundable to millions of lower-income households.

Table 1 shows the impact of the child tax credit's expansion on middle-income families. In each row, income tax liability is computed for a hypothetical couple with no children or 1, 2 or 3 young children, earning $50,000 in wages and claiming the standard deduction. In the first row, a baseline of 1996 tax law before enactment of the child tax credit, differences in taxes by family size were modest, $1215 between no children and two children. The third row reflects current law and illustrates the large drop in taxes for families with 2 children ($3540 down to $253) compared to no children couples ($4755 down to $3468).

Table 1. Income Tax Liability For Hypothetical Middle-income Taxpayers Under Different Child Tax Credit Policies (2016)

  No children 1 child 2 children 3 children
Baseline: No Child Tax Credit (CTC)(1996 tax law) $4755 $4148 $3540 $2933
$500 CTC, nonrefundable for < 3 kids(1997 legislation) $4755 $3648 $2540 $1433
$1000 CTC, 15% refundable for wages > $10k,
10% bracket and increased standard deduction
(2001 legislation)
$3468 $1860 $253 -$1285
$2000 CTC, 45% refundable for wages > $0
(Clinton proposal)
$3468 $860 -$1748 -$4285

Note: (1) In each case, a married couple earns $50,000 in wages and claims the standard deduction. All children are assumed to be under 5 years old, the age threshold for which Clinton proposes doubling the child credit. (2) In 2001, additional tax changes (marriage penalty relief and a new 10% tax bracket), also reduced taxes on middle-income households. (3) The refundability threshold was reduced from $10,000 in wages to $3,000 in 2009. This provision has no effect on a household earning $50,000.

Using the AEI Open Source Policy Center's tax modeling capabilities, Chart 1 shows the actual current average federal income tax liability for middle-income taxpayers with zero, one, two, and three children. The results clearly show that families with children do better than those without children, with the biggest families doing the best.

As I described in a recent article, Democratic Presidential nominee Hillary Clinton wants to further boost the child tax credit. She would double it to $2,000 for children under 5 and increase the refundability of the credit for more low-income households. Her proposal will further exacerbate the tax disparity between childless households and families with young children. As Table 1 illustrates, a typical middle-income household with two young children would have their entire income tax liability eliminated and would receive a $1748 refund.

The steady expansion of the child tax credit since 1997 comes at a significant fiscal cost. Starting from a baseline without any child tax credit, Chart 2 displays the cost of the original $500 child tax credit enacted into law in 1997, the partially refundable $1000 child tax credit enacted in 2001, the expanded refundability enacted in 2009, and the expansion proposed by Hillary Clinton.

Liberals and conservatives alike have cheered family-friendly tax breaks for low- and middle-income families. Many liberals see them as an important offset for the enormous financial burdens these families bear and some conservatives see them as a reward for the contribution these families are making to our societal future. But it should also be recognized that these policies shift the cost of raising a child both onto childless households and, by adding substantially to the federal deficit, onto future generations.

 

Alex Brill is a research fellow at the American Enterprise Institute, served as an adviser on tax policy to the President's Fiscal Commission, and is a former senior adviser and chief economist to the House Ways and Means Committee.

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