The logic of childcare tax credits

Last updated on: February 24, 2015 at 9:39 pm by Jane the Actuary

The logic of childcare tax credits 2015-02-24T21:39:18-06:00 Jane the Actuary

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I’ve been waiting for lunchtime to write this up:

Should the government provide tax credits for child care? Or is it “fairer” to just provide tax credits (e.g., per-child benefits) for all families, and let the parents make their own decisions?

Let’s talk about taxes.

Imagine a middle-class couple. Both spouses work at white collar jobs, but they’ve now had their first child, and they’re deliberating whether Mom should stay home with the baby, work part-time, or go back to work. They’re running the numbers on daycare costs, vs. the net drop in income if she stays home.

Now, let’s run the numbers from a government perspective. The marginal cost of Mom returning to work, in terms of use of government services, is pretty much zero (especially if you exclude services funded separately, like Social Security or unemployment benefits). I suppose you could make a case that there’s a small increased use of government, if that’s one more car on the road during the morning commute, but that’s offset by the nonuse of other government programs, such as local park district or city-sponsored enrichment programs or library storytimes.

On the other hand, the marginal benefit, in increased tax revenue, of Mom returning to work, is substantial, especially since, as the “second earner,” all her income is effectively taxed at the family’s top marginal tax rate. Plus, all their additional spending — on childcare itself, on meals out, and so on — drives further tax revenue.

In this raw fiscal-impact perspective, it makes a ton of sense for the government to push women to work, to increase GDP and tax revenue. In fact, in discussions in Germany (back a while ago, when we were living there) on state subsidy of childcare centers, this was front-and-center: these subsidies would more than pay for themselves by increasing tax revenue, and bringing more mothers into the workplace was an explicit goal and method of dealing with the declining working-age population relative to retirees.

In this approach, of course, refundable tax credits don’t get you anywhere — and the tax credits could never be more than the amount of tax that the “second earner” pays to begin with, and should be decidedly less. (The current tax credit doesn’t require this.) And, of course, if you don’t succeed in moving more mothers into the workforce, but just make those that do, a bit happier, you haven’t achieved that tax-maximizing goal.

Backing up a bit, is this approach “fair” to families? I suppose the question is, what’s the “fair” tax rate for second-earner families? But, in principle, so long as tax credits are only reducing the additional amount of tax paid by the second earner, this isn’t yet a case of forcing stay-at-home-parent families to subsidize the childcare use of dual-working-parent families.

And, of course, none of this has to do with the debates of whether the government should actively subsidize the cost of daycare so as to make it so nearly-free that women work while their children are young without a second thought, or the statements by some on the left that it’s a moral injustice not to do so, per Obama’s prior statement of “That’s not a choice we want Americans to make,” nor does it address the question of whether, GDP impact or no, small children are better off with more time with Mom and Dad, less time in institutional settings.

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