Next year is going to see an epic showdown over tax policy. Many provisions of Republicans’ 2017 tax law are set to expire, and most people's taxes will go up if Congress doesn’t step in.
Of special interest to parents, and to Republicans’ growing working-class base, will be how the final compromise treats marriage and children among the less well-off. Getting this right is the key to supporting families without forgetting the lessons of welfare reform.
The 2017 tax law doubled the child tax credit, making it now worth up to $2,000. Without congressional action, it will be halved again, though the old exemptions for dependents will also return.
The CTC is designed to refund parents’ income taxes and, for lower earners, reimburse some of their payroll-tax burden as well. It isn’t sent as a check to parents who don’t pay taxes at all, and it “phases out” for the extremely well-off.
Today’s CTC thus supports parents by significantly reducing their tax burden, and it also supports work — because one must work and pay taxes to benefit. But the Left, and even parts of the pro-family Right, have sought to remove that latter guardrail.
Giving the benefit even to nonworkers, or making it “fully refundable,” would destroy the work incentive built into the CTC . This is out of step with what people say they want .
Lawmakers should resist such proposals and be skeptical of smaller steps in that direction, such as giving out the CTC based on work in either of the past two years, rather than just the year for which taxes are being filed. (A bill currently before Congress, though it looks unlikely to pass before the election, takes this approach.)
Instead, the CTC should largely be continued as it is today, though it should automatically increase with inflation, which doesn’t currently happen.
Beyond that, lawmakers looking to boost help for families should look at a different policy: the earned income tax credit.
Like the CTC, the EITC is given only to those who work and focuses on parents (though nonparents can receive a small benefit). But unlike the CTC, the EITC sends checks to workers in excess of the taxes they pay — and it phases out as parents rise through the middle class, instead of only for the wealthiest taxpayers.
This structure makes it a powerful incentive to work and a strong, focused support system for working-class families. But there’s one huge problem: the EITC brutally punishes working parents for being married, as I recently pointed out in a Manhattan Institute report .
Say a parent with two children earns $35,000, and the parent’s romantic partner earns the same amount. If the couple is unmarried, the parent will receive around $4,000 this year . Married, the couple will receive nothing.
Want thousands of dollars? Don’t marry someone who works. Unsurprisingly, some single parents make exactly that choice. A 2016 study found that “single mothers who expect to lose earned income tax credit benefits upon marriage are 2.5 percentage points less likely to marry their partners and 2.5 percentage points more likely to cohabit.”
The status quo’s astonishing depravity, however, presents an extremely attractive option for those looking to restore and help the working-class family. Addressing this marriage penalty would provide additional funding specifically for folks of modest means who (a) are married, (b) work, and (c) have children. And it does so not by creating a special benefit just for them, but by addressing a bias against them in the current system.
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There are numerous options for addressing this problem, which will come with varying price tags. For example, the EITC could be based on the income of the higher-earning spouse rather than the couple’s total income, or policymakers could allow married couples to subtract part of their second income. Given the country’s dire fiscal straits, policymakers should not expand benefits beyond what their eventual compromise is able to pay for.
This thorny issue combines tax burdens, family policy, and the parties’ evolving political constituencies. The looming expiration of a major tax law is going to force Congress to deal with it in a polarized environment. Next year’s fighting won’t be pretty. But it can result in a durable compromise that supports working families.
Robert VerBruggen is a Manhattan Institute fellow.
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