Have Kids? You Deserve a Tax Break
Hard at work.
Parenthood comes with lots of surprises. Among the largest is surely the price tag: In the U.S., each little one costs roughly $245,000 to rear, on average, not including college. Parents who undertake those costs aren't just raising the next generation of upstanding citizens: They're also subsidizing their childless peers. The tax code should do a lot more to help them out.
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Entitlement programs such as Social Security and Medicare depend on younger generations of workers to contribute payroll taxes. Nonparents don't have to pitch in for all the diapers and iPhones and orthodontics required to raise those workers, yet they're entitled to the benefits the youngsters eventually pay for.
That's not only unfair, but it also creates a perverse incentive: For a given individual, generous entitlements discourage procreation by reducing the need for a child's help in old age. Yet sustaining those benefits requires the country as a whole to produce more kids. The fertility rate in the U.S. is now at an all-time low, and Social Security, according to one study, has been responsible for about half its decline. Meanwhile, as you may have heard, the baby boomers are retiring.
A sensible way to alter this dynamic is through the tax code. Parents today can claim a tax credit of up to $1,000 for each child, plus an exemption that can lower their taxable income by up to $3,950 (phased out for higher earners). They also receive various less direct benefits (public schools, for instance, which nonparents help pay for). But all told, these don't amount to much, given the costs and burdens of parenting and the necessity of reproduction for sustaining public benefits.
Fairly compensating parents for what their newborns will contribute to entitlement programs would require a credit closer to $10,000, estimates Robert Stein, a former Treasury official. That would surely be too costly. But Stein suggests a $4,000 credit -- applied against both the income tax and payroll taxes -- would be reasonable and could supplant other elements of the tax code related to kids, including the child-care credit, the dependent exemption and the adoption credit. This would simplify things, offer some relief for parents and help correct the system's inherent bias against having children. Studies indicate that it might even boost fertility.
And it could be a boon to the poor: In 2013, the child tax credit kept some 3.1 million people out of poverty, including 1.7 million children. Keeping kids out of poverty can have lifelong benefits in terms of their educational attainment and earnings.
This approach also makes more sense than expanding the child-care credit, as many Democrats advocate. That credit subsidizes one particular cost of parenting that may not make sense for every family. And expanding it is likely to increase the price of commercial day care and to place the government's finger on the scale in parents' decisions about whether to work outside the home. A bigger child credit would let parents make up their own minds about how to spend the money and thus about who minds their kids.
Paying for this, of course, will require trade-offs. They ought to be debated if tax reform gets a serious airing in this Congress. (One idea: Scale back the mortgage-interest deduction, which already subsidizes parents as they buy larger homes but comes with a long and costly list of distortions.) Expanding the child credit, however, remains the right thing to do as a matter of fairness and principle -- which can't be said of every break in the Internal Revenue Code.
Procreating is a fairly fundamental duty of our species. It's especially important in nations with generous benefit systems for the elderly. Parents deserve some more recognition for this vital work, and some more cash to help them do it.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.