NATIONAL CENTER FOR POLICY ANALYSIS HOME / DONATE / ONE LEVEL UP / ABOUT NCPA / CONTACT Child Care Tax Credits: A Supply-Side Success Story
FOOTNOTES 1.David R. Henderson is an Associate Professor of Economics at the Naval Postgraduate School in Monterey, California and a Senior Fellow of the National Center for Policy Analysis. The author wishes to acknowledge John C. Goodman for helpful comments.back 2.The credit applied to children under age 15 prior to January 1, 1989.back 3.See Roberta Ott Barnes, "The Distributional Effects of Alternative Child Care Proposals," Urban Institute, October 1988, for an example of this approach.back 4.David M. Blau and Philip K. Robins, "Child-Care Costs and Family Labor Supply," Review of Economics and Statistics, Vol. LXX, No. 3, August 1988, pp. 374-381.back 5.Expenses up to $2,400 may be claimed for one child. Expenses up to $4,800 may be claimed for two or more children.back 6.Beginning at an annual income of $10,000, the 30 percent credit is reduced by one percentage point for each additional $2,000 of income until the 20 percent credit is reached.back 7.Technically, the law applies to men as well as women. As a practical matter, the law affects mainly the labor market activities of women.back 8.A tax deduction for working mothers was first adopted in 1954, on the theory that such deductions were equivalent to business expenses. The law allowed a deduction of up to $600 of expenses and was phased out for families earning between $4,500 and $5,100. In 1976, the deduction was converted to a tax credit. The 1981 tax reform act raised both the ceiling on the credit and the percentage credit for lower-income families.back 9.Background Material and Data on Programs Within the Jurisdiction of the Committee on Ways and Means, 1989 Edition, Committee on Ways and Means, U.S. House of Representatives, Table 15. Between 1976 and 1981, the number of families claiming the credit increased by an average of 384 thousand per year. Between 1981 and 1986, the average annual rate of increase more than doubled to 874 thousand per year. Following the 1986 tax reform, which moved many low-income families off the tax rolls, the number of families claiming the credit was projected to fall to 8.2 million in 1988, and to rise continuously thereafter.back 10.These and other calculations reported in this study are based on the analysis in the Appendix.back 11.Barnes, "The Distributional Effects of Alternative Child Care Proposals."back 12.Another reason is that low-income families are less likely to "purchase" child care. According to Douglas J. Besharov of the American Enterprise Institute, about 60 percent of families with incomes under $15,000 use unpaid relatives for child care. See Family Affairs, Vol. 2, No. 1, Spring, 1989, p. 4.back 13.An analysis of the effects of a refundable tax credit is presented below.back 14.Jaclyn Fierman, "Child Care: What Works -- And Doesn't," Fortune, November 21, 1988, pp. 163-176.back 15.The individual is assumed to face a 50 percent marginal tax rate (federal income tax, state and local income tax, and FICA tax combined). Thus, the tax benefit is 50 percent of $5,000. Note: under the Family Support Act of 1989, a family must choose between either the Dependent Care Credit (DCC) or a flexible spending account. I thank Roberta Barnes for pointing this out.back 16.In the 1981 tax reform, working wives received a 31 percent reduction in federal income taxes, compared with a 23 percent reduction for other taxpayers. See David R. Henderson, "Analyzing the Reagan Record," NCPA Policy Report No. 114, October, 1984, p. 17. Although the special tax provision for working wives was eliminated in the 1986 tax reform, many working women experienced additional tax relief when the marginal tax rates for families were reduced to 15, 28 and 33 percent. back 17.See Statistical Abstract of the United States, 1975 and 1988. Refers to families with a husband present in the household.back 18.Quoted in Fierman, "Child Care: What Works -- And Doesn't."back 19.See U.S. Department of Labor, Labor Market Shortages, January 1989.back 20.Fierman, "Child Care: What Works -- And Doesn't."back 21.Based on static revenue estimates generated by the Urban Institute's micro-simulation model. Results reported in an Urban Institute Briefing Memorandum by Roberta Barnes and Linda Giannarelli, December 12, 1988.back 22.The Urban Institute's static revenue analysis estimates the bill will increase government revenue by $60 million.back 23.Single women with children would have to work in order to be eligible for the credit.back 24.The Senate version of the proposal was introduced by Robert Dole (R-KS). The tax credit would be refundable. The existing Dependent Care Tax Credit would also be made refundable. Families could claim either credit but not both. back 25.See Phyllis Schlafly, Who Will Rock the Cradle? (Washington, D.C.: Eagle Forum Education and Legal Defense Fund, 1989); and Allan C. Brownfeld, "Why Does the Child Care Debate Neglect the Child?" Human Events, July 1, 1989, p. 10 ff.back 26.The current dependent care tax credit is made 90 percent refundable; the current earned income tax credit is expanded to allow refunds up to $750 per year per child under age four; and a new refundable credit of up to $500 per year per family is created to pay for health insurance for children of low-income working families. Eligible families may claim all three credits.back 27.The remaining 30 percent is to distributed as follows: 8 percent for administration, 10 percent to increase the quantity of day-care and 12 percent to increase the quality of day-care.back 28.The national median is $32,777 for a family of four.back 29.Senator Pete Domenici (R-NM) estimates that it would cost at least $20 billion a year to meet the full demand. See Brownfeld, "Why Does the Child Care Debate Neglect the Child?" p.17.back 30.Joanne Pratt, "Legal Barriers to Home-Based Work", National Center for Policy Analysis, Policy Report No. 129, September 1987.back 31.Ibid. back 32.Virginia Postrel, "Who's Behind the Day-Care Crisis?" Reason, June, 1989, p. 24.back 33.Ibid., p. 25.back 34.Pratt, "Legal Barriers to Home-Based Work."back 35.Some of these restrictions were successfully contested. See Postrel, "Who's Behind the Day-Care Crisis?" back 36.Ibid., p. 24.back 37.For an extensive analysis of the harmful effects of occupational licensing regulations, see Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1961); S. David Young, The Role of Experts: Occupational Licensing in America (Washington, D.C.: Cato Institute, 1987); and John Goodman, Regulation of Medical Care: Is the Price Too High? (Washington, D.C.: Cato Institute, 1980).back 38.Blau and Robins, "Child Care Costs and Family Labor Supply."back 39.For a similar method of estimation, with similar results, see David R. Henderson, "The Supply-Side Tax Revenue Effects of the Child Care Tax Credit, Journal of Policy Analysis and Management, 1989, forthcoming.back 40.U.S. News and World Report, June 5, 1989, p. 69.back 41.The Philip Morris Companies, Inc. Family Survey II: Child Care (New York: Philip Morris Companies, Inc., 1989), p. 15.back 42.Although a working wife is assumed to earn a low income, her marginal tax bracket may be high because of her husband's income. back 43.For supporting evidence, see The Philip Morris Companies, Inc. Family Survey II: Child Care, pp. 14-15.back 44.Estimates of the elasticity of working with respect to the wage range from 0.4 to 1.5. See James P. Smith, ed., Female Labor Supply: Theory and Estimation (Princeton: Princeton University Press, 1980)back 45.Calculated as follows: $7.00 per hour x 33 hours per week x 50 weeks per year.back 46.This is the employee's share of the Social Security tax.back