Tax Policy

Tax Credit For Stay-At-Home Moms?

Some Republicans are promoting adoption of a tax credit for mothers who forgo outside employment in order to care for their young children at home. They say that if working mothers receive subsidies and benefits to have their children cared for by others, shouldn't mothers who reject a paycheck also be rewarded?

But the tax credit is almost guaranteed not to accomplish its stated goal of encouraging women to forgo work and stay at home with their children -- even if the dollar value of the tax credit for staying at home were exactly equal to the dollar value for day care.

For example:

  • A woman receives a tax credit of up to $2,000 -- either to pay for a day-care provider or to keep for herself if she stays at home to tend her little one.

  • Assume that the annual cost of day care is $3,000 and the average aftertax wage of a mother in a family that qualifies for the maximum tax credit is $20,000.

  • The mother who continues to work and place her child in day care is out-of-pocket only $1,000, rather than $3,000 -- a two-thirds savings, and a powerful financial incentive to continue using day care.

  • A mother who quits her job to stay at home with her child forgoes $20,000 of income and is out-of-pocket $18,000 -- a 10 percent reduction in her sacrifice, and a weak financial incentive to stay at home.

Critics point out that the tax credit for stay-at-home mothers will affect those who have a substantial source of income other than their own earnings and have tax bills sufficiently large to take advantage of the credit. So the money will go to those who would have stayed at home anyway -- leaving the revenue shortfall to be picked up by other taxpayers.

Source: Charles Murray (American Enterprise Institute), "The Perils of GOP Activism," Wall Street Journal, February 20, 1998.

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