Mitt Romney wants to dramatically expand the child tax credit, while cutting other aid programs and tax subsidies to pay for it. The idea would boost poor and middle-class families, simplify the safety net, and reduce poverty, yet cost the same as the status quo. It deserves serious debate and consideration, both during the present stimulus negotiations and in the future.
In the current system, parents receive up to $2,000 per child per year through the credit — but the benefit is not fully available to low-income parents, who often have little or no tax liability to offset. Instead, those parents are eligible for various safety-net benefits including cash welfare, food stamps, and the earned-income tax credit.
Romney would consolidate that supplemental patchwork into a single benefit and eliminate some other tax breaks. Most parents, including those with no tax liability, would receive $350 a month ($4,200 a year) for each kid under six, plus $250 a month ($3,000 annually) for older kids up to age 17, with a maximum benefit of $1,250 a month. Like the current child credit, Romney’s benefit would phase out for individuals earning more than $200,000 a year and couples earning twice that.
For younger kids, that’s a bigger benefit than even Joe Biden proposed in his stimulus plan, though Biden would not cut other programs and he’d boost the credit only for one year (at least to start). Romney plans to introduce his change as an amendment to the Democrats’ stimulus package.
Let’s take a quick tour of Romney’s proposal: what it would create, what it would get rid of, and whether it’s all a good idea.
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The centerpiece of the proposal, obviously, is the big checks it would send to parents. There are numerous justifications for such payments, though they remain controversial here on the right.
Many conservatives want the government to do more to make it affordable to start a family, and some also say that our current system overtaxes parents. The latter argument goes like this: Social Security and Medicare redistribute money from younger generations to older ones, but in order for this to happen, members of the older generations need to make big investments in having and raising kids. People who have lots of kids, therefore, basically subsidize the retirement of their less-fecund peers, and they deserve to get this subsidy back.
Liberals, meanwhile, like the effect that free money has on poverty. The Niskanen Center finds that Romney’s proposal would have a huge impact: Poverty in general would fall about 14 percent, while child poverty would fall by a third and “deep” child poverty (i.e., kids in households with incomes below 50 percent of the poverty line) would fall by half.
In addition, the child tax credit has a big advantage over other programs when it comes to “welfare cliffs”: Many programs phase out quickly as people make more of their own money, basically punishing them for working more hours or getting a raise. One recent analysis found that Americans just above the poverty line lose about half of any additional earnings to benefit cuts and taxes. The child tax credit, by contrast, doesn’t phase out until folks are well into the upper-middle class. It also doesn’t go away when you get married (unless you marry someone incredibly well-off) and thus doesn’t impose a marriage penalty.
To be clear, the credit does have some potential for undesirable consequences, too. Giving people money for having kids could encourage out-of-wedlock childbearing, for example, or enable some parents to get by while working less or not at all. I take those consequences a bit more seriously than some other supporters of the credit do. Empirically, though, they’re kind of like the minimum-wage debate: There would clearly be big knock-on effects above a certain threshold — no one can say with a straight face that a million dollars per kid wouldn’t affect work and childbearing — but studies of existing hikes sometimes can’t identify such effects at all.
And importantly, the credit is offset in various ways by other changes Romney would make. Budget-wise, in fact, the changes cancel each other out perfectly: Romney would increase spending on the child credit by about $113 billion a year, but he’d trim $47 billion from the earned-income tax credit, $17 billion from cash welfare, $3 billion from food stamps, $17 billion from the “head of household” tax-filing status, $5 billion from child-care subsidies, and $25 billion from the state-and-local tax deduction.
These changes are very complicated, with lots of potential to prompt pushback from both the left and the right. At minimum, however, they show we can do more for families without making the government bigger.
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Two changes conservatives may be wary of are cuts to the earned-income tax credit (EITC) and cash welfare (Temporary Assistance for Needy Families, or TANF).
The former is possibly the most popular anti-poverty measure among conservatives. Basically, it rewards the poor for working, helping to ensure that work pays better than welfare. Some research has found that it’s effective in pushing single parents to find jobs — though there are also good reasons to be skeptical, recently laid out in a study from Princeton’s Henrik Kleven. Other common criticisms are that it gives very little money to the childless, making it a weird hybrid of a work subsidy and a parenthood subsidy, and that it imposes a marriage penalty. Plus, like any welfare benefit, it starts phasing out at relatively low incomes.
Since Romney’s child credit would replace much of the aid that the EITC gives to parents, he’d transform the credit into a work incentive primarily for adults. Single people could get up to $1,000 a year, and married people twice that, with an additional $1,000 for households with children (no matter the number). This would cut spending on the credit by about two-thirds. It’s a defensible change, but some may worry about shrinking a pro-work tax credit to fund one with no work incentive at all.
Then there’s cash welfare. We on the right tend to see the 1996 welfare reform as a massive success, as it got rid of an old system with terrible incentives against work and marriage while creating a system with time limits and work requirements, with the result that poverty among single moms fell dramatically. Romney would simply kill that system.
Cash welfare is a pretty small part of the overall welfare state these days, with plenty of its own dysfunctions — and much of the benefit of the 1996 reform came from blowing up the old system rather than from the precise contours of the new one. But, as with the earned-income credit, Romney’s proposal moves funding from a benefit with work requirements to a benefit without them.
Food stamps might be fertile ground on which to shore up these concerns. The Supplemental Nutrition Assistance Program (SNAP) is massive, even when the economy is doing well, and its work requirements are pretty weak. Like the EITC, it gives more benefits to people with more kids, and thus is arguably redundant with a huge child credit. Romney would trim a little fat from the program (specifically when it comes to “categorical eligibility,” a trick that states use to give food stamps to people who otherwise don’t qualify), but this is a tiny share of the money offsetting the new checks, and food-stamp work requirements are a place where the plan could do a lot more to gain conservative support.
Other changes here are more likely to irritate the Left. For example, Romney would end “head of household” filing status. This status gives some of the tax benefits that married couples receive to single parents as well. Because they contain two adults, married couples have higher tax brackets, an extra standard deduction to take, etc. — and thus they pay less in taxes than a single person with the same income. Head-of-household status gives single people about half of the benefits of being married, so long as they have kids or other dependents, with the side effects of incentivizing out-of-wedlock childbearing (because having a kid raises a single person’s brackets and deduction) and disincentivizing marriage among single parents (because they already have half the usual tax benefits of marriage). The problems with the head-of-household status are obvious enough, though it’s also not crazy to think that single parents would be overtaxed relative to married parents without it, and many on the left will surely see this as an evil plot to nudge people into marriage.
Further lined up for execution in Romney’s plan is the child-and-dependent-care tax credit, which subsidizes day care for working parents who are well-off enough to have tax liability. The government shouldn’t be subsidizing day care, so good riddance, but I don’t expect Democrats to love this.
Lastly, and perhaps most infuriating of all to the Left, there’s Romney’s desire to destroy what’s left of the state-and-local tax deduction. The deduction subsidizes high taxes in blue states at the expense of the federal budget, and it should die, but the political costs of killing it are undeniable.
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All in all, Romney’s plan strikes me as a great starting point. I have some reservations about giving out such a big benefit with no work requirement, and about funding it by cutting some programs designed to encourage work. But I love the core concept of replacing complicated safety-net programs with a simple, flat benefit for most American families. Those to my left and to my right will obviously have different concerns. But it’s good to see a Republican starting this sorely needed conversation with a serious, detailed proposal.