Taxes and Children:
Child tax credits, dependent deductions, and other tax effects:
In the current tax code in the United States, children are one of the largest factors influencing the total tax a person pays. A person or family supporting children can claim exemptions, reducing their taxable income by thousands of dollars for each child, and, especially for low-income taxpayers, children qualify for a variety of different tax credits, including the Earned Income Credit (EIC), the child tax credit, and the additional child tax credit. There are also additional credits and deductions available, as well as tax credits whose rates are affected by whether or not a person claims children as dependents on their tax return.
Arguments for and against these credits:
Arguments for child tax credits:
The arguments in support of child tax credits are relatively straightforward, and hinge both on the concept of fairness, as well as on social effects and the welfare of children involved. Children require considerable financial resources to support. Financial difficulties can place huge stresses on children and family, and can have negative impacts on the children's health and success later in life, and thus, can influence the prosperity of society as a whole.
Deductions and exemptions serve two purposes. One is as a sort of emergency or stop-gap measure, a lot like a welfare program, to help the poorest taxpayers, people who are raising families and struggling to make ends meet. However, there is a second purpose, from which even relatively wealthy taxpayers also benefit, which is the ideal of fairness: because people raising children have much less disposable income to enjoy a similar standard of living as those without children, it is seen as "fair" that they pay less tax. This argument is subjective, as, for wealthier people with many economic choices, one could see child-rearing as a luxury, a choice that they make.
Arguments against child tax credits:
- Because there are such strong financial benefits to claiming children as dependents on a tax return, the credits and deductions create a very strong incentive for fraud. This fraud can be difficult to catch, and the laws surrounding the credits difficult to enforce. The fraud results in massive amounts of cash flowing into the hands of people who are not supporting children in any meaningful way, draining government (taxpayer) coffers and resulting in a less fair distribution of wealth within society.
- Even when there is no fraud and tax laws are followed to the letter, there is no guarantee that the parents are supporting their children. A parent or family who spends more money on their children pays the same tax rate and receives the same tax credits as a parent or family who spends the same money on luxury items.
- The tax credits for children are so strong that they influence people's decisions to have children, and because they are primarily available to low income taxpayers, they encourage low income people to have more children. Because the people having children for these reasons are the ones least likely to be good parents, these additional children are going to be at high risk for falling into crime or contributing to other social problems that can be highly costly to society.
- Although most of the deductions and tax credits phase out for very high income levels, some of them, such as the basic exemption, student loan interest paid by parents, and the child and dependent care credit (for child care expenses), still benefit very wealthy families.
- The "fairness" argument is subjective; one could equally well argue that it is fairer for people to not have to pay a higher tax rate because they choose to not have children.
I understand the arguments of fairness, and I recognize that many people raising children face severe financial hardship. However, I see the downsides of the tax credits as too great. I would rather eliminate all of these credits and seek a different way of alleviating the social pressures of parenting. Rather than reducing taxes or making cash payments to parents, I would rather find ways to reduce the financial costs of parenting.
When I imagine an ideal legal, governmental, and tax system, I imagine a world in which children would have no effect on taxes paid. That is, there would be no special tax credits, nor any tax penalties, for having or supporting children. However, in the short-term, I do not necessarily support for the immediate elimination of these credits and deductions--the credits and deductions exist because of financial hardships, often severe, faced by people raising children. Removing all the credits too quickly, without implementing other changes, could have catastrophic effects on the lives of many of the poorest children and parents, and could even have damaging effects on the middle class, as our society has become strongly shaped around and dependent on the tax credits and deductions associated with children.
Keep in mind that many of these points are actually moot in my ideal world; my tax plan outlines the elimination of all income tax as an ideal to be worked towards. However, given that we currently tax income, I would like to see us work towards eliminating tax credits and deductions associated with raising children, and instead find other ways to alleviate the social problems associated with the struggles poor people have with raising children.
References and Further Reading:
- Child Related Tax Benefits Comparison - Earned Income Tax Credit Central, IRS
- Child and Dependent Care Credit - Wikipedia article about this specific credit
- Child tax credits - A general Wikipedia article on the topic of child-related tax credits
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