The Corner

Economy & Business

A Few Points about Taxing Families and Subsidizing Child Care

Senator Elizabeth Warren (D, Mass.) is joined onstage by her family at a rally to launch her campaign for the Democratic presidential nomination in Lawrence, Mass., February 9, 2019. (Brian Snyder/Reuters)

This is the topic du jour thanks to Elizabeth Warren’s plan to heavily subsidize commercial day care. I outlined my thinking on the subject in a 2014 National Affairs piece, but it seems worth repeating some of the highlights:

1. As many others have noted, people used to rely on their kids in old age, and thus would reap some of the reward of raising them. Today, however, we’ve socialized that benefit through Social Security and Medicare, so that each generation collectively relies on the paychecks of its children — which means that parents are effectively subsidizing everyone else’s retirement. If we’re not going to create individual accounts for the retirement programs so that each person funds his own retirement, it makes sense to offset this investment with a larger child tax credit.

2. A trickier question is how to tax families with different working arrangements, in particular two-working vs. stay-at-home couples. My view is that the government has no business putting its thumb on the scale when it comes to these kinds of decisions: It should not be pressuring parents to work or to stay home with children. There are simply too many variables here, and different arrangements will be appropriate for different families depending on their precise situations, including their earning capacities, their ambitions and values, their parental capabilities, and the child-care options available to them. On the society-wide level, increased use of day care might improve the economy — one day-care worker might watch, say, four kids, freeing up several moms to pursue high-paying jobs — but there’s some evidence it could be bad for kids. Well, except for kids in troubled home situations, who might benefit. Given how personal this decision is and how murky and value-laden the tradeoffs are, the state should pursue a neutral policy and let each family decide.

3. That’s easier said than done. A taxing arrangement that appears neutral through one lens might seem horrifically biased through another.

4. Subsidizing day care is not one of those difficult-to-assess situations. It taxes everyone, including workers whose spouses stay home and those who rely on informal child-care arrangements, to subsidize workers who put their kids in commercial day-care facilities. This is such a transparently terrible and discriminatory policy that I’m not sure how anyone supports it, but here we are. (And no, day care isn’t a “work expense” that should be deductible, either: Work expenses are undertaken solely for the benefit of one’s employer; day care is like a 45-minute, two-gallons-of-gas commute, an expense that depends on the combination of work and personal decisions you’ve made. A personal decision doesn’t become eligible for tax subsidies simply because it makes it harder to get to work.)

5. However, the current tax code is unfair to two-working couples in some ways. The Social Security “spousal benefit” formulas are a big offender in this regard. And the basic structure of the income tax is arguably one too. Here’s how I explained it for RealClearPolicy a few years back:

Imagine two couples. Both earn $60,000 — but one does this with a single full-time worker, while both individuals in the other couple work at $30,000 apiece. The first couple has no daycare expenses, more free time, and roughly half the commuting expenses. Is it really fair to tax them both the same when one couple is plainly better off?

This results from the fact that couples share their tax brackets and deductions, which are higher than those for single people but the same regardless of whether one spouse or both work. It’s a setup that reduces the tax burden of a worker who adds a non-working spouse but usually doesn’t much affect two workers who marry each other. A related problem is that when one spouse already works, the second spouse faces a blunted incentive to: The first spouse already burned through both individuals’ standard deductions and pushed the couple into a higher tax bracket, so all of the second person’s income is taxed at an elevated rate.

A second-earner credit for families with kids makes some sense to me; others suggest just ignoring marriage and taxing everyone individually, though this then raises the question of whether the unemployed spouse of someone with a six-figure income should be eligible for the same safety-net benefits he’d get if he were single; still others, like Ramesh Ponnuru, don’t think this is a problem at all. Yet others think that the economic benefits of staying home, such as having no need to pay for child care, should be taxed . . . or that stay-at-home parents deserve to be compensated for their labor even beyond saving that money. Heck, if we had a flat tax the entire issue would disappear.

Which option is “neutral”? I’ve been thinking about this for years and I’m still not 100 percent sure.

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