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Articles and Writing

November 5, 1995
"Low-Income Tax Credit for Children is Sensible"
San Jose Mercury News
By Timothy Taylor
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THE CENTERPIECE of the tax cuts in the Republicans' Contract With America is a $500 per child tax credit. There are so many sensible, prudent, judicious reasons to oppose such a tax cut that, at a contrarian level, it almost has to be a good idea.

For deficit fighters, the credit costs too much. The Senate version would cost $141 billion over seven years, even though it limits the credit to single-earner families with income below $75,000 and couples with income under $110,000. The House version, which would go to all households with incomes up to $200,000, would cost even more.

For supply-siders, the child tax credit is a waste of money because it's aimed at families with children. They would rather see lower tax rates for everyone, or targeted incentives for saving and investment.

Those who obsess about inflation worry that a tax cut would stimulate demand in an economy that is producing near maximum capacity, and thus hovering near the edge of inflation. The Federal Reserve might react to such a tax cut by raising interest rates again.

Those anxious about helping the needy point out that since many of the poor don't earn enough money to have income tax liability, a tax credit won't help them.

Growth incentives, budget deficits, inflation, helping the poor - that's a hefty lineup of hard-eyed, sober-sided concerns. But it's not the whole story about the child tax credit.

Back in 1991, a National Commission on Children was established by Congress and appointed by George Bush. In its report "Beyond Rhetoric: A New American Agenda for Children and Families," one of the top recommendations was for a $1,000 per child tax credit.

The logic for such a credit was straightforward, then and now. Twenty percent of America's children, including 40 percent of African-American children, live in families below the poverty line.

Too many boys are involved in violence; too many girls have babies. Too many parents find their time and money and energy stretched thin. Too many small children get off to a difficult start in a fiercely competitive U.S. economy.

Dozens of proposals claim to address these problems: different flavors of education, welfare, and health care reform, job training, early childhood intervention, social services in the inner cities, and on and on. None is a sure thing. But one thing government can accomplish, without a doubt, is to put more money in the pockets of working families with children.

There was a time when the tax code was friendlier to families. In 1960, for example, the personal exemptions built into the tax code meant that a two-parent, two-child family at the median level of income would not have paid taxes on the first 40 percent of its earnings.

But inflation has eroded those exemptions. Today, a family of four at the median income finds that the personal exemptions shelter only the first 25 percent of its income from taxation.

The personal exemption means that a certain amount of income is not subject to tax; in contrast, you subtract a tax credit directly from your total tax bill. But despite the difference in form, the $500 per child tax credit is a mechanism for turning back the clock on the income tax, to a time when it was better disposed toward families.

The child tax credit isn't properly characterized as a tax cut for the rich, as some Democrats like to proclaim. It doesn't affect the higher income tax rates for the wealthy. Moreover, a credit is available to everyone who has income tax liability, even if they don't itemize deductions.

Since the credit is capped at $500 per child, the credit would produce a relatively larger benefit for poor families than the middle-class or wealthy. Further, the child tax credit is an incentive to work, because it only helps those who are working enough to have some income taxes to reduce. It also would help the working poor, who have suffered from the increasing inequality of wages in recent years.

If only the child tax credit didn't cost so much. President Clinton has proposed limiting the credit to households that earn less than $75,000, which would cut the tab to $55 billion over the next seven years. For someone like me, who has worried for years about the huge U.S. budget deficits, that's still too much. But I'd support a child tax credit limited to households that are below the median U.S. household income, now about $38,000, and then phasing out above that level.

A $500 dollar tax credit won't save America's children by itself. But it's one concrete thing the government could do to ease some of the pressure on America's stressed-out families.

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