The Corner

Politics & Policy

Middle-Class Families and Tax Reform

When the Republicans’ “framework” for tax reform came out, I raised two related concerns about it. Here I’ll consider them separately.

The first problem is that the framework is compatible with tax increases on a lot of middle-class families. The expansion of the standard deduction and the child credit will unequivocally lower tax bills, but the abolition of the personal exemptions unequivocally raises them and the new rate structure’s effects depend on where the threshold for each tax bracket ends up being set.

At Forbes, Ryan Ellis plugs in some reasonable assumptions about what the Republican bill will look like—he includes a $500 expansion of the child credit, for example—and then runs through a few examples of households that would get a net tax cut. He calculates that a married couple with two children, making $87,000 a year, would get a $1,223 tax cut.

It’s fair to say that under these assumptions, a lot of middle-class families would get a tax cut. But other families wouldn’t be that lucky. Some would receive next-to-nothing, and others would face tax increases.

So that’s problem number one. If they want to avoid raising taxes on a lot of middle-class families while sticking with their framework, Republicans are going to have to plug in the remaining numbers very carefully—and probably going to have to expand the child credit by more than $500 per child.

Problem number two is a little subtler. Assume that the Republicans go with the $500 per child expansion, as Ellis assumes. Because they also get rid of the personal exemption, that means that they have designed a tax cut that rewards people for not having children. Take Ellis’s couple making $87,000 a year. If they had three children, they would get $100 less in tax relief than if they had two. And another $100 less if they had four. For couples with higher incomes, the tax cut would get $500 smaller per child.

If U.S. policy was wildly pro-natalist, unfairly subsidizing large families at the expense of small ones and parents at the expense of non-parents, that might be a reasonable policy. But that’s not our policy regime at all. The combination of ending the dependent exemption and raising the child credit by $500 increases the parent penalty already embedded in federal law.

(The tax-calculation examples have been edited to correct mistakes–RP.)

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