The hug-that-wasn’t might have cemented meaningful assistance for low- and middle-income families.
Following Ivanka Trump’s meeting with Senator Marco Rubio and others about including an expansion of the Child Tax Credit in the upcoming tax reform, the White House sounded convinced. “Allies on and off the Hill have said that enhancing the Child Tax Credit will best achieve President Trump’s promise to increase working families’ flexibility,” an administration official told the Daily Mail.
If the White House’s plan includes an expansion of the CTC along the lines proposed by Rubio and his fellow senator Mike Lee, it deserves plaudits. This would be good news for American families, particularly those just getting by. Making the credit fully refundable — i.e., available to families without enough tax liability to take advantage of it — would be an even better anti-poverty measure, but would probably face too much opposition from fiscal hawks.
But expanding the credit should also entail making it more effective at aiding middle-class and poor families, both at the time when a child is born and through his or her early childhood. CTC expansion is a more compelling conservative alternative to paid-leave and child-care schemes. Here are some ways the credit could achieve the goals of such schemes without unduly interfering in families’ decision-making.
First, Congress should pilot an advanced Child Tax Credit. Having a child is a delight and a joy, but it also introduces expense and uncertainty into new parents’ lives. Allowing them to access the value of their credit at the time of the child’s birth, rather than on the subsequent April 15, would give them the help they need at the time they need it, reducing the need for new paid-leave programs.
Successfully implementing this would require solving some logistical problems. One imagines a system in which the IRS and the Social Security Administration coordinate to issue an estimated CTC when parents apply for their newborn’s social security number. Nonprofit groups could work with hospitals and obstetricians to ensure moms are made aware of the potential benefit as part of their prenatal care.
But an advanced CTC is preferable to a new government paid-leave program for several reasons. A federal paid-leave policy would threaten to crowd out current, more generous paid-leave programs provided by firms, and it would squelch the federalism already at play in different state policies.
Companies that are already offering more-generous leave policies could continue to do so without raising costs for everyone else. Companies that are not — predominantly small businesses — can still be rewarded for doing so, as through Senator Deb Fischer’s proposed tax credit for companies that voluntarily instate a paid-leave program.
This approach to expanding support for new moms isn’t a sexy new government entitlement, but an incremental approach that encourages companies to do the right thing. Using carrots, not sticks, is more in keeping with the principle of limited government and encourages firms to compete for workers by offering better benefits instead of mandating a universal approach.
The second advantage to advancing the CTC is that a paid-leave program, by its very nature, only helps moms who are re-entering the workforce. NRO’s Robert VerBruggen recently explored the implicit paternalism of many paid-leave advocates. The principle of horizontal equity would lead us to favor a tax system that treats all moms, whether working full-time, working part-time, or staying at home, equally.
The most thoughtful exploration of federally based paid-leave proposals came from a recent joint project of the American Enterprise Institute and the Brookings Institution, which proposed a compromise in which new moms receive a 70 percent wage guarantee, up to $600 a week, for six weeks after their baby is born. In this scenario, women making under $857 a week, or roughly $44,500 a year, would receive less support than women in the upper end of the income distribution, who would receive the full $600. (Keep in mind that the median income for women who work full-time, year-round is $40,742.) Women who stay home would, of course, receive no assistance at all.
By contrast, making the CTC refundable against both payroll and income taxes, as in the Rubio-Lee proposal, would allow even the lowest-income families to benefit. A household earning only $16,340 a year would receive the full $2,500 refundable credit for a new child.
An advanced CTC is preferable to a new government paid-leave program for several reasons.
Philosophically, this is far more appealing than a paid-leave program that gives moms the upper half of the income distribution more assistance than those below the median. Plus, 42 percent of mothers of children under one year old are not in the labor force. Should we be implicitly penalizing those who want to take some time away from the work force to care for their new baby?
Also, if we have concerns about the ability of moms with means to adequately prepare for their new addition, tax-advantaged savings accounts for prenatal and childbirth expenses could be a less intrusive way to accomplish that. For lower-income moms, however, who have less ability to save up in advance and benefit less from tax perks because they fall into lower tax brackets, the predictability of an advanced CTC would be more equitable and efficient.
That leads to the second point of improvement Congress could make in the CTC. Especially if we are interested in using an advanced credit to smooth parents’ income after childbirth, it makes sense to break up the credit into two tiers. In, say, the first four years of a child’s life, the CTC would be higher, maybe $3,500, when the adjustment to parenthood and new consumption patterns (i.e., diapers and daycare) are the hardest. As the child gets older, the CTC could be bumped back down to $2,500, maybe even slowly phasing out as the child nears adulthood.
An intriguing example of age-based credits already exists in Iowa, which offers a refundable Early Childhood Development Credit equal to 25 percent of the first $1,000 of expenses on books, preschool, lesson plans, educational activities, and the like. It limits the credit to parents with an annual income of less than $45,000 with children between three and five years old. Another model we might adopt comes from British Columbia, which recently expanded its universal child benefit to provide an extra boost to families with children under six.
The B.C. model is a much better example of investing in early childhood than the federal Child and Dependent Care Tax Credit, which is currently only available to households who pay for child care (ignoring those who work yet have a family member watch a child). The CDCTC is non-refundable, which means most of its beneficiaries are families making between $75,000 and $200,000 a year.
Collapsing the dependent exemption and the CDCTC into a two-tiered Child Tax Credit would make the tax code’s treatment of well-off and poor families more fair, and not privilege one type of family decision over another.
The current conversations around paid leave and supporting working families revolve around the very real challenge of providing support to new parents. Advancing and enhancing the CTC to better address the needs of new parents is a better alternative to competing paid-leave proposals, and is politically salient as well.
If the White House does indeed champion an expansion of the CTC in tax-reform negotiations, conservatives owe the administration applause and support. But the conversation must continue about how to implement that expansion in a way that treats low- and middle-income families fairly.