Thanks to a new proposal from Mitt Romney and Michael Bennet, the child tax credit is once again at the center of an intra-conservative debate. As I hinted a few days back, there are a lot of different right-of-center takes on the credit because different conservative principles tug in different directions.
My goal here is to provide a quick overview of what different right-wing camps think and why. But first, a tutorial on how the child tax credit, most recently adjusted during the 2017 tax reform, works today.
When you receive a tax credit, you subtract the amount of the credit from the amount you owe in income taxes. (A deduction, by contrast, is subtracted from the income you owe taxes on.) The credit is worth $2,000 per child, so someone with $5,000 in income-tax liability and two kids gets a $4,000 credit, reducing his liability to $1,000.
But what if that person has less than $4,000 in income-tax liability to begin with? In that case, he can take the credit for whatever liability he does have, and also use the “additional” child tax credit to, in effect, get back some of his payroll taxes, the ones collected for Social Security and the like. Specifically, the additional credit is worth 15 percent of one’s income above $2,500, up to a maximum of $1,400 per child.
Put differently, the child tax credit is “partially refundable,” and it “phases in” by increasing as people earn more of their own money. (It also phases out at higher incomes.) If the credit were “fully refundable,” the full value would be given to everyone with kids, whether or not they paid any taxes at all.
Where to go from here? There are four main options floating around conservative policy circles.
1. Kill it.
This is the view of many traditional economic conservatives, and the reasoning goes like this: You can call something a “tax credit” if you want, but if you’re giving it to some people but not others and using it as a reward for doing what the government wants — in this case, having kids — it’s no different from any other subsidy. Conservatives should not support subsidies, period.
2. Keep it, but make sure it relieves taxes and doesn’t become welfare.
This is basically an argument for the status quo, though it also encompasses modest expansions such as the Rubio-Lee amendment from 2017, which would have made the credit refundable against all, not just some, payroll-tax liability. There are several ways to arrive at this opinion, which might be why the current system is what resulted from decades of conservative compromises.
One is a simple love for tax breaks of any kind. In this case, the child credit is fine so long as it relieves someone’s tax burden and isn’t sent to them as a bonus check, which would make it spending instead of a tax cut.
The other is a bit more interesting and complicated, the view laid out by folks such as Robert Stein and our own Ramesh Ponnuru. These analysts start by pointing out a problem with the modern entitlement system: It used to be that parents would pay to raise children and then reap the rewards when their kids cared for them in old age; now, thanks to Social Security and Medicare, parents still pay to raise kids, but in retirement they rely collectively on the income of the next generation. We’ve socialized the benefits of having children but not the costs, and the child credit helps to compensate parents for some of the costs. Put bluntly, raising children should count as a tax payment, and should be subtracted from the taxes parents otherwise owe.
Logically, this might seem to apply even if a parent has no tax liability: If I owe the government $0 but contribute $2,000 anyway by raising kids, I should get my $2,000 back. But the poor parents who aren’t eligible for the credit are often eligible for other benefits that, like the credit, give more money to people with more kids. In their case the credit is redundant and should not be given.
Another conservative argument for the status quo, specifically the “phase-in,” is that it serves as a work incentive if the child tax credit increases as people earn more of their own money and accumulate more tax liability.
3. Make it fully refundable, but pay for this by consolidating other welfare spending.
In this view, which happens to be my own, we could make the tax credit more logically coherent and improve poverty policy by making the credit fully refundable while simultaneously making the rest of the safety net less sensitive to how many children one has. Each child would count as a tax payment of the exact same amount, and benefits such as food stamps would increase less with each additional child.
One of the big problems with welfare spending is that different benefits phase in and out at different thresholds, creating situations where the poor can face high marginal tax rates — in some cases, they can even lose money when they earn more because they hit a “benefit cliff” and lose access to a program all at once. Giving the poor the exact same tax credit as the middle class, with no phase-in, while making the phase-outs of other programs less dramatic, ameliorates this problem.
Samuel Hammond and Robert Orr had a good proposal along these lines a few years back.
4. Make it fully refundable, period.
In The Fiscalization of Social Policy (which I reviewed here), Josh McCabe laid out the fascinating history behind the fact that Canada and the U.K., but not the U.S., have “child allowances” that give parents money, no questions asked, and enjoy support across the political spectrum. Over the years since World War II, Canada and the U.K. have come to embrace the idea that support to parents doesn’t always have to qualify as either welfare or tax relief. It can instead be “income supplementation,” money to help offset the costs of raising kids whether the parents are poor or not, and whether they pay taxes or not.
Here on the American right that kind of just sounds like socialism, but some of us have been coming around to this kind of thinking. In supporting a bigger child credit, many will tout the benefits of reducing child poverty or supporting families, rather than arguing that parents are overtaxed. These folks will support a child allowance even if it’s not paired with other reforms to the safety net, and simply comes on top of the existing welfare state.
The Bennet-Romney plan is likely the first Republican-endorsed bill to take up this concept. It would expand the child credit for kids under six, make the credit fully refundable up to $1,500 for those kids and up to $1,000 for older kids, and phase the rest of the credit more quickly than current law does.
Should the senators stick with this plan going forward, it could give us an indication of how much traction this fourth option has with elected Republicans.