Sunday, October 23, 2016

Clinton's Child Care Program: Immature Tax Policy

Back in May, Democratic presidential nominee Hillary Clinton said that she wanted to bring child care costs down to the point where they would not cost beyond ten percent of one's income. At the time, it was unclear as to how she was going to achieve that goal. Was she going to use tax breaks to do it? How about subsidies? We don't have to wait to answer that question anymore. A couple of weeks ago, she released the latest details on her tax plan. Three such details pertain to how she will tackle the Child Tax Credit (CTC). First, she plans to double the CTC from $1,000 to $2,000. Second, she plans to change the refundability threshold, which purportedly will allow for the poorest of the poor to claim the Credit. Finally, the plan is to phase in families with children under five years old more quickly. What sort of effects would this have on the United States?

First, let's cover the cost Clinton's CTC plan. The Tax Policy Center estimates that Clinton's plan will reduce revenue by $209 billion over the next decade, which is not all that far from the estimate of the Tax Foundation that estimates that it will reduce revenue by $199 billion over the next decade. I covered the topic of the child tax credit last year, and found that over the next ten years, the CTC is expected to cost $550 billion. What these findings mean is that Clinton's plan will minimally cost an additional 36 percent from what it initially would have.

Then there are the alleged benefits. The Left-Leaning Center on Budget and Policy Priorities (CBPP) released findings that estimate that these CTC modifications would help 14 million families, and even more importantly, raise 1.5 million families out of poverty. The Brookings Institution provides similar praise to Clinton's plan. While some laud Clinton's plan, I retain my skepticism, some of which dates back to my blog entry from last year:

  • The current CTC does not distinguish between family size or socio-economic status, and the Clinton plan does not help with those distinctions. 
  • As the Economist points out, this will increase tax code complexity, not decrease it. 
  • There are doubts as to whether there is the desired short-term consumption stimulus, e.g., Michel and Ahmed, 2012.
  • I already had reservations about the phase-out creating a high marginal tax hike. This would only be more pronounced with Clinton's plan.
  • Since the plan is primarily a tax credit expansion, this plan does nothing to grow the economy. As a matter of fact, the aforementioned Tax Foundation study found that it would actually decrease the GDP by 0.1 percent over the next decade. 
  • While the phase-in portion has the potential to offset the phase-out, the effects of the CTC are still not clear, especially in light of the Earned Income Tax Credit (EITC), which arguably is more successful
  • Since the increased credit is available for four-year-olds and not five-year-olds, many families will deal with the joy of their taxes increasing by $1,000 once their child turns five, which makes transitioning to kindergarten more problematic. 
  • Clinton's plan increases the burden upon childless families to support families with children (see below). In other words, Clinton's plan does not help with the lack of horizontal equity in the CTC. It merely exacerbates the lack of horizontal equity. 

Clinton's plan is primarily a income tax hike disguised as a tax cut. Even the Congressional Budget Office considers the CTC as a form of spending. I prefer a simplified tax code over a complex one targeted towards social engineering. Clinton's plan is primarily an expansion of what is already a tenuous tax credit to begin with. While I am happy to see Clinton propose policy alternatives (unlike some other candidates), I am still disappointed that she could not come up with something more innovative or altering to make a significant difference in poverty rates.

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