It would be better to fund paid leave, child care, and wage subsidies.
Thanks to Ivanka Trump, Republican members of Congress and their staff will spend part of their summer thinking about paid leave and child care. For conservatives, the question has moved from whether to provide additional relief to parents, to how.
An expanded Child Tax Credit (CTC) is increasingly emerging as an elixir for family policy among congressional Republicans — something that can help cover the costs of any and all child-related costs: parental leave, child care, preschool, stay-at-home parenting, and beyond.
Currently, the CTC is a partially refundable tax credit of $1,000 annually paid out to families for each child in the household under the age of 17. Senators Rubio and Lee have proposed a new child tax credit of $2,500 that could be applied against payroll and income taxes.
To be sure, an expanded CTC has many merits. And given the status quo, I’d take a larger CTC over no additional relief for parents struggling to work and raise children in today’s economy.
But in the long run, targeted investments in paid leave, child care, and wage subsidies are likely to bring about better economic outcomes, provide more relief to the families that need it most, and keep federal spending in check.
Providing Broad-Based Relief
The biggest advantage of the CTC is its flexibility. The CTC is not tied to a specific use, such as offsetting child-care expenses. It arrives with tax returns each year and can be used for anything, from offsetting paid-leave expenses, to meals, to toys, to babysitting, to preschool, to bolstering savings accounts, to shopping sprees.
This flexibility allows families to put the money to its best use for them. Economists have found that increased family income, particularly for low-income families, is associated with improved outcomes for children and reduced poverty. Increasing the refundability of the tax credit helps on this front.
But the broad nature of the CTC comes with several downsides. Because the CTC is spread out over a large population with few restrictions, it’s quite expensive. The CTC costs $550 billion over a 10-year budget window. The Tax Policy Center estimates that a new partially refundable $2,500 child tax credit could cost $1.2 trillion over the next decade — even a fraction of which would be a major line item by any standard.
And while costing quite a bit in terms of forgone revenue, it’s not clear the CTC changes the status quo in a meaningful way. There’s no evidence the CTC results in more parents’ being able to stay at home full-time who couldn’t before, results in more parents’ working who couldn’t before, increases access to preschool or child care, or expands maternity- or paternity-leave access.
In aggregate, the CTC appears to simply make it easier for families to do what they were already doing, with the benefit of additional relief.
Changing the Status Quo
This latter point is a big concern given the acute challenges millions of families are facing. For example, one-quarter of new mothers return to work within two weeks of giving birth out of financial necessity or because they lack the job protection to take more leave.
Many mothers are shut out of the labor force because of prohibitively high child-care costs (reaching five digits on average for infant care), perpetuating a cycle of poverty especially for single mothers for whom the alternative is welfare. Persistently low wages have prevented many two-parent families from being able to have one parent stay at home, and on the other end of the spectrum, have discouraged work altogether. Importantly, these things are occurring with a $1,000 CTC already in place.
A universal credit by its very nature is delivered irrespective of need, timing, or expense, and thus limited in its ability to move the needle on these big issues. The majority of Americans support more targeted efforts to change the status quo, such as a paid-leave policy.
Similarly, there are no accompanying economic effects of the CTC in increasing work-force participation, improving upward mobility, or increasing economic growth, the lack of which find some of their roots in the lack of family-friendly policy in the U.S.
Between 1990 and 2010, the U.S. fell behind its OECD peers when it came to women’s labor-force participation, and scholars attribute nearly a third of that trend to our lack of family-friendly policies, such as child care and paid leave. This has resulted in a significant (and preventable) drag on economic growth.
Targeted policies can dramatically improve economic outcomes for mothers in particular as well as families and the economy at large. A large literature finds that paid parental leave — such as the consensus plan by the AEI-Brookings Joint Working Group (which I was part of) — increases work and wages and reduces reliance on other government benefits, such as food stamps, suggesting greater economic independence for recipient families.
The Earned Income Tax Credit and expanded child-care tax credits boost family income and increase work-force participation and wages, helping improve parents’ economic trajectories. Even reducing marginal tax rates and payroll-tax rates would have the effect of putting more money back in families’ pockets, but with significant growth effects because such reforms would change the incentives around work.
Given the economic challenges we face as a country, investments in family policy that carry robust pro-growth benefits should be particularly attractive. Importantly, stay-at-home parents would benefit from these policies also. Remember that in all households, at least one parent must be working. For this parent, higher wages from EITC investments and tax reform could help to offset the cost of the other parent staying at home or to pay for child-related expenses. Paid parental leave would enable all parents to be at home in the early weeks of a child’s life.
Considering Our Political Reality
There is yet another consideration to pay attention to when considering family policy: our political reality.
Imagine that Republicans pass an expanded CTC this Congress. The price tag of the new CTC would make it difficult to pay for out of cuts to existing spending. It would provide some relief to parents but not fully take the air out of the balloon for paid leave and child-care reform.
This would give Democrats full runway to pursue their extremely expensive and government-heavy paid-leave and child-care proposals on top of an expanded CTC. It is worth pointing out that this is what Democrats have been wanting all along. In the 2016 presidential campaign, Hilary Clinton proposed expanding the CTC in addition to paid leave and child-care reforms. This may be a good thing for parents across America, but conservatives should realize that this is the worst outcome from a budget perspective and would significantly constrain resources for other investments.
In this regard too, it may be better to address the issues that working parents are facing with targeted policies. A modest paid-parental-leave program such as that put forward by the Trump administration, combined with an expanded and refundable Child and Dependent Care Tax Credit and an expanded wage subsidy, would more clearly address some of the major issues families are facing, bring about significant economic benefits, and slow down the implementation of more expansive policies. Paired with broader tax reform, this would put substantial resources back into families’ pockets and grow the economy at the same time.
There’s agreement among conservatives that relief is needed for parents working and raising children in the 21st century. That’s the good news. The CTC offers a tremendous amount of flexibility for different family arrangements and expenses. But it is unlikely to move the needle on major family and economic issues and could end up putting considerable strain on the federal budget. Sadly, that’s no elixir.
READ MORE:
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— Abby M. McCloskey is an economist and the founder of McCloskey Policy LLC. She has advised multiple Republican presidential campaigns.