In the recent $1.9 trillion spending bill, Congress passed a measure to give monthly payments to parents with children. Although the measure will expire at the end of 2021, there are moves on both sides of the congressional aisle to implement a permanent child allowance. The amounts are not small. Under the current program that Congress passed, families will get a $3,600 annual tax credit for each child under age six and a $3,000 tax credit for children ages six to seventeen. Many congressional Democrats want to extend the program beyond the end of the year. And Republican Senator Mitt Romney, far from opposing such a program, has recently proposed a child allowance of $4,200 per year for a child under six and $3,000 a year for a child between ages six and seventeen.
Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget deficit and debt. Moreover, there are other ways of dealing with the legitimate concerns of those who favor a child allowance, ways that involve not more taxes and deficits but more deregulation, particularly in the areas of housing and immigration.
This is the opening of latest Hoover article, “Child Tax Credits Feed Debt and Dependency,” Defining Ideas, April 23, 2021.
Another excerpt:
Another reason the Romney child allowance is wrong is that it’s not targeted at the needy. That lack of targeting is what makes the program so expensive. The Romney bill would grant full child allowances to single income tax filers with income up $200,000 a year and to joint (married) filers with income up to $400,000 a year. My wife is not, like me, a libertarian. Instead, she’s a normal person with a lot of common sense. When I told her that people with incomes that high would get federal subsidies, she said that was absurd. And because the subsidy phases out at a rate of $50 for every $1,000 in income above those limits, even families making $500,000 a year could get a partial child allowance. To put those numbers in perspective, in 2019, median household income was $68,703. If there is a case for per-child payments, the payments should be targeted on people with an income below the median and probably well below the median.
Read the whole thing.
READER COMMENTS
John Hall
Apr 24 2021 at 9:59pm
“Another reason the Romney child allowance is wrong is that it’s not targeted at the needy.”
I think this is the weakest argument of the piece. A big problem with the current welfare system is trying to “target” things. It results in a phase-out cliffs that deter behavior. Consider the relationship between a universal basic income and a negative income tax: they are basically the same thing. If you think a negative income tax is targeted, then a universal basic income must also be targeted. Thus, a child tax credit that you think of as universal could also think of like a negative income tax. Just have some payment X combined with an increase in tax rates so that eventually the tax credit fades out and is sufficient to pay for it.
I would probably structure an even more generous one. Instead of a flat dollar value, I would provide the smaller of a dollar value or a percent of income. This would provide an absolute tax benefit for those with lower incomes and maintain a relative size of it as incomes increase. I would also make the benefits less generous if you have more than 3 children.
Other arguments you make are why not do X or Y other good policy. Those are largely good policies, but that other policies are good does not mean this one is good or bad.
john hare
Apr 25 2021 at 5:41am
One thing I noticed in the article was the assumption that child care costs would drop with increased immigration. IMO the regulatory effects might be a bigger driver than assumed here. The limitations on day care centers seem like a larger cost than employee wages last time I paid attention.
That was quite some time ago so my assumptions may not hold. I do remember a friend in an apartment complex explaining that several families rotated watching the kids such that all the women there worked outside the home some. The savings on day care costs were huge. Dim memory so I assume huge was relative.
With this post I didn’t notice the mention of young girls incentivized to have kids regardless of the qualities of the father. Coming from the wrong side of the tracks myself, I’ve heard many references to wanting to get pregnant so they can get a check.
Thomas Lee Hutcheson
Apr 25 2021 at 6:52am
I do not understand the contraposing of child allowance with immigration reform. Why not support the child allowance (financed with new taxes — we should be shrinking not expanding the permanent deficit) in return form opening up immigration for young highly educated/educatable, entrepreneurial people and maybe other kinds of reforms like zoning, occupational licensing, resetting the risk tolerance of DFA, etc.?
We should unpack “dependency.” Doesn’t targeted assistance, which dries up is effort => income => less targeted need, create more “dependency” than a child allowance the does not dry up.
Now I think one could have a debate about why a higher EITC would be an better alternative or at lease a compliment to increase the attractiveness of labor force participation.
Juan Manuel Perez Porrua Perez
Apr 25 2021 at 7:11am
With this post I didn’t notice the mention of young girls incentivized to have kids regardless of the qualities of the father. Coming from the wrong side of the tracks myself, I’ve heard many references to wanting to get pregnant so they can get a check.
This wouldn’t be a problem if the so-called tax credit were simply an unconditional transfer — i.e. not conditional on having children. I will say that having single parents work less is not entirely bad: the less time they can afford to spend away from market work they can spend in household activities.
Phil H
Apr 25 2021 at 8:29am
A terminology question: These allowances are called “tax credits,” but Henderson then says, “It’s wrong to forcibly…give to others simply because they have children.” In US terminology, does a tax credit actually involve giving money? I understood it to mean “taking less money (in tax).”
David Henderson
Apr 25 2021 at 4:02pm
The article is about child allowances. The title mentions tax credits. But, as with most authors, I didn’t get to choose the title.
Michael
Apr 25 2021 at 6:30pm
Romney proposed a child allowance paid by the Social Security Adminstration, “paid for” by eliminating some existing federal welfare-type programs, the current and less generous Child Tax Credit, and the state/local tax deduction.
Biden’s Covid-19 bill includes, I think for 2 years, what is called a ‘refundable’ tax credit. In practical terms, that means one receives the “tax credit” whether or one has earned income and paid income/payroll taxes. Any parent making less than $75K/$150K would be eligible to receive Biden’s credit. What’s more, I believe the Biden plan calls for the IRS to distribute 50% of the amount in the form of monthly checks to eligible recipients. Like all of Biden’s Covid-19 bill, this 2 year plan is financed by borrowing.
Bottom line: Romney’s plan is not a tax credit at all and Biden’s plan, while technically a ‘tax credit,’ is really better thought of as a child allowance distributed by the IRS through the tax system.
Mark Barbieri
Apr 25 2021 at 6:33pm
It depends on the tax credit. If it is a refundable tax credit, like the child allowances or the earned income tax credit, people can get the credit even if they don’t owe any taxes. In other words, the credit actually is the same as giving someone money. Non-refundable tax credits, like the mortgage interest deduction can only be used to reduce the taxes a person owes and cannot result in them having a negative tax rate.
In the end, there really isn’t much difference between the government sending money to people or having credits that reduce people’s taxes. The non-refundability of credits is essentially the same as a tax credit that phases out at for people who’s taxable income falls below a certain level so that it is not available to low income people.
I find it simplest to think of all deviations from a simple tax as government expenditures designed to be more palatable by presenting them as tax breaks.
Phil H
Apr 25 2021 at 11:14pm
Blimey. It’s always weird when three people fail to answer a really super-simple question.
Do any of these new policies/policy proposals actually involve the government *giving* money (like benefits in the UK); or do they all involve the government *taking less* tax?
(Of course, you can argue that these amount to the same thing; the argument might even be right! But first of all I’d just like to know what we’re talking about.)
Matthias
Apr 25 2021 at 11:28pm
The refundable tax credit involves just straight out handing out money to people with low tax obligations.
Michael
Apr 26 2021 at 6:43am
Romney’s propsal calls for the Social Security Administration to send out monthly checks of $250 per child over age 6 and $350 per younger child.
Biden’s proposal calls for the IRS to offer a credit of $3,000 per year ($3,600 per year for children under age 7) per child, with 50% of this amount distributed via monthly check and the remaining 50% given with the tax return. This money would be given to any parent under a particular income threshold ($75K/$150K) whether or not they earned income and paid tax.
So, the simple answer to your simple question is ‘yes’, both plans involve the government actually giving money out.
David Henderson
Apr 26 2021 at 11:10am
The Romney child allowance is a government handout of money, not a tax credit.
Michael Sandifer
Apr 27 2021 at 1:11am
David,
You say that like it’s a bad thing. I see nothing wrong with more handouts, which I would call entitlements, as societies grow wealthier. Of course, it should be done in a fiscally sustainable way.
David Henderson
Apr 27 2021 at 11:58am
You wrote:
I do see it as a bad thing, but my purpose in using that language was simply to answer Phil H’s request for clarification and so it made sense to use the language he used.
Michael
Apr 25 2021 at 9:14am
A difference between pre-reform welfare and the benefits proposed by Biden and Romney is that pre-reform welfare had a strong work disincentive effect that the Biden and Romney plans lack.
Specifically, pre-reform welfare recipients who found jobs and started earning income would lose their welfare benefit. Moral judgment aside, that is an obvious work disincentive. Because the Biden/Romney plans phase out at higher income levels, most recipients of the increased child tax credit don’t face the same disincentive.
When Scott Winship, whose work David cites, has been asked about this issue, he simply ignores it, as here:
David has written about the work disincentive effects of increases in marginal tax rates. But no mention work incentives when claiming that the Biden/Romney child allowences are like pre-reform welfare. Why not?
Michael Sandifer
Apr 25 2021 at 10:11am
I would prefer a generous negative income tax that guarantees a minimum income of $35-40,000/year for citizens who work at least 40 hours, but I’m lieu of that, I’ll take this. We should be encouraging higher population growth anyway, via open borders, but that won’t happen soon, so something like this might start to give us a bit more population growth. Unfortunately, we have to wait a generation before seeing most of the benefits.
Matthias
Apr 25 2021 at 11:29pm
Wouldn’t that just lead to a lot of nonsense make believe time wasting?
Of course, lots of people would find ways to fake 40 hours, too.
Jerry Brown
Apr 25 2021 at 3:57pm
“My wife is not, like me, a libertarian. Instead, she’s a normal person…”
Well I am not a normal person either 🙂
David Seltzer
Apr 25 2021 at 7:20pm
From a libertarian POV, those people with children CHOSE to have them. Why then should any individual be forced to subsidize those parents. As cruel as some will interpret this, I personally am not duty bound top provide for another. Especially when I was not consulted as to the child bearing decision.
Diana Weatherby
Apr 27 2021 at 2:14am
I am not a big fan of constantly throwing money at people and would prefer to get rid of entitlements but I have to say, as long as my kids have to support a bunch of elderly people who never did anything for them but leave them with a lot of taxes, why not? I’d rather see child tax credits than blanket stimulus checks and all that other pork, though neither would be preferable.
As children get more expensive and the benefits of having them go to society rather than the parents individually, faulty incentives are created. Middle and upper class people choose to forgo children or just have one, though drug users seem to have no problem having many that end up in foster care. They want to give them a great education, a healthy diet, and then pay ridiculous amounts for college and costs are prohibitive. Meanwhile private incentives like having them help you on the farm or help you when your are elderly are gone. After all, the taxpayers will care for you.
Meanwhile, all the childless couples will gladly take their SSI check that the next generation will fund. They will expect the next generation to pave their roads, nurse them when sick, fix their homes and vehicles, and all other care etc.
We are below replacement level as far as birth rates are concerned and I don’t want to encourage ONLY the poor to have children. I want more educated stable adults for my children to work with and problem solve with. Immigration will also help but it’s good to remember we have set up a strange system where there is little incentive to promote the next generation.
Matthias
Apr 25 2021 at 11:33pm
Instead of seeing the refundable child allowance as something parents get (and childless people don’t), try a different angle:
As an accounting issue, logically charge the child subsidies to the children instead of the parents. Everybody is a child exactly once (apart from immigrants and the current generation of natives 😉 so everybody gets the same amount of benefits eventually. No matter whether they decide to have kids themselves or not.
That the subsidy is paid out to the parents is just an administrative necessity, because kinds ain’t good with money.
Jerry Brown
Apr 26 2021 at 12:49am
I think that is a great way to look at it.
Ryan M
Apr 26 2021 at 10:38am
I will say, though… if it is a tax credit, rather than a tax payment, then at least it is less like taking money from some to give to others, and more like allowing some people to keep more of their own money. In that sense, it’s not really a transfer payment so much as a somewhat arbitrary exemption from having to make transfer payments.
Unless it is structured in such a way that those who do not pay taxes in the first place will receive an actual payment. That would be an even more terrible idea, given the perverse incentives it will create.
Sarah Stefaniuk
May 7 2021 at 5:15pm
Sometimes I wonder if “Think Tanks” are more “Think Bubbles” of stale ideas. And this essay is a perfect example of the old, unimaginative arguments of “GroupThink” from yesteryear. While I am a little weary of the debt that this Child Tax Credit policy may produce, I believe the benefits will far outweigh the potential negative impact to the point that it may negate it entirely. Indeed, the child tax credits will literally feed the 1 in 6 American children living in poverty (actually, it’s probably more than that now). And more importantly, it could serve to nurture their minds and spirits. And as a result, albeit counterintuitively, it might even put it into decline in the long run. That is, if Biden does not find the revenue to fund this initiative in the first place by taxing the wealthiest people and corporations accordingly. So, there is much potential in Biden’s proposal. Yet, there is so much opposition.
I can almost hear the author stamping his foot as he writes, “my fundamental objection to the child allowance is that it’s wrong to take wealth from some and give to others.” But, throughout human history, this redistribution of wealth has occurred all the time — in all manner of economic systems. Except that the money is usually taken from the poor and given to the ultra wealthy. Surely it contributes to the problem that a whopping 17.8% of Americans live in poverty today. And it certainly has helped create the wealth gap that is transforming into a wealth canyon between the richest 1% and the rest of us. I think that the US might be the wealthiest developing country in the world given some of the alarming wealth distribution statistics and other systemic and structural challenges.
But this uncommon form of wealth distribution, apparently, is going to cause dependency on, and abuse of, the State. Supposedly, “tens of millions of children will grow up thinking that the government owes them something just for being children.” All because Mom received a check and told her inquiring children that it came from the Government. But, this “insidious” foregone conclusion is just a fantasy and there’s no data that really supports this argument.
But, what if the throngs of children grew up to believe that the Government should do something for them? I must ask, what is the problem with that? Governments do lots of things for people, especially the ultra rich and behemoth, enormously wealthy companies. I would argue that one of the most important roles of Government is to, in fact, help raise up its most vulnerable people. And those people are children. Children should have the right to be fed, educated, and provided health care. It’s the minimum one needs to embark on the road to life, liberty, and the pursuit of happiness. And, their parents’ lack of money should not subject them to anything less than that. After all, it isn’t their fault that their parents are poor. Finally, there is no demonstrated, measured, and validated harm in the mere thought that the government should do something. We are all allowed, as Americans, to actually have our own thoughts — even about the role of government.
But, I can agree with one idea: that the program is not wholly focused on those who need it: those children and families that live below the poverty line. And it does make it more expensive. But, without doing an analysis of how much more cost is added by making it universal, it’s hard to weigh the pros and cons. However, at least distribution to the middle class could be very helpful. Anecdotally, I know my parents received a monthly Child Allowance cheque from the Canadian Government when I was growing up. We were a middle class family of six mostly living off a print journalist’s salary (hint: it wasn’t a lot). I remember having many conversations with my Mom about the Allowance, and I know that it did have a positive impact on our lives. And, not surprisingly, it didn’t make us dependent either. I suspect that most middle class families could use extra help, particularly if they have more children. Indeed, $68,000 is perhaps a median income in the United States but it makes a big difference if you are single or supporting a family of 3, 4, or even 6. Raising children is not cheap — and it’s getting more expensive. Not to mention that the government has a very strong interest in the growth of families and its population as it pertains to its future economic health. So, I think more data is needed before we can start having a meaningful discussion on who should get the benefit.
But wait, free money from the government is sure to cause women to leave the workforce. Though, I don’t see how a $3,800 or $4,000 allowance can coax a woman to leave her job when she needs, on average, to spend $284,570 to raise her child to the age of 18. And that obviously doesn’t include the costs beyond 18 — like college. The math doesn’t work for me, nor would it work for anyone. And nor does the evidence from other countries that provide allowances and generous welfare support systems.
One reason women do leave the workforce though is the cost of childcare which continues to skyrocket. The trend is everywhere — particularly during these COVID-19 times. I’ve seen it with my own eyes throughout my career and in my own neighborhood. At best, a working mom in a viable job, creates a net neutral contribution to the family income due to childcare costs.
But apparently, immigration changes will provide an influx of nannies from other countries that will reduce the labor costs. Thus, families will be able to afford them. Interesting thought. Note that the salary range for Nanny care in the Bay Area, for example, is between $17 and $25/hour. So, I’m just not sure how much further we’d want to drive down those wages for people taking care of our children. I’m not sure that I want to know the answer. In short, this is not a solution to a very complex problem.
And the challenge is much more than what the author submits. He puts forth an oversimplified argument that the problems are rooted in high housing and child care costs. Yes, those are big problems. But what about low, stagnant wages? What about the cost of college? And healthcare, to mention only a few not-so-small contributing factors. Moreover, everything has been exacerbated by the Pandemic and the new tsunami of challenges that it has drowned us all in.
So, for so many reasons, the fantasy of deregulation is not going to wash away the troubles. Sorry, we can’t build and babysit our way out of this multi-layered, complicated disaster. As much as I love the Supply & Demand fairy tale of economics, it doesn’t work that way. Not to mention, the cost to build is so high right now. It makes no sense to build anything but luxury living accommodations (in the Bay Area). And we all know that there are many (over) developed, large, expanding cities that continue to be expensive (unaffordable) to live in, namely: New York, Toronto, Vancouver, Paris, London, etc. And there is no point in creating a poverty-stricken Nanny Class by bringing in “mostly women” from poorer countries, right?
As I mentioned earlier, the deficits and the debt growth potential is worrying. If the author is right, we’ll have a record debt of 113% of GDP by 2031. This would have truly alarmed me if he had not brought up the precedent of the 112% of GDP situation back during the days of WWII. That historical situation gives me hope that Biden is doing the right thing. Back then, we were in an all out war against a terrible enemy. Now, we are in an all out war against a pandemic. And the war has not ended and will not end until we’ve defeated COVID-19 around the world. So, this spending is more than justifiable and I feel confident that we can reduce the deficit down to it’s later 20th Century levels — just as we did before.
Whether it’s Liberal or Conservative policies that see us through to the future, I can see a Tax Credit working for both ideologies. Simply giving money to parents with no-strings-attached (aka no government interference) so parents can use it as they see appropriate is a pure Conservative approach. And for the Liberals, it redistributes wealth. It’s a win-win.
But most of all, it’s a win for Children. With a little imagination and heart, one can see the little people getting some support that they need to help them thrive in the future. A healthy, educated, happier childhood produces active, participating, smart, contributing adults in the future. And more than anything, that is what our Country needs. So, if the child tax credit helps us get there, it could prove to be a great investment. I am in.
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