Developments in Child Benefit Idea

It's been a while since I've written about the idea of a universal child benefit scheme (i.e. providing equal per-child cash benefits to all families). So I figured some catch up on the development of the idea out in the wild, and a rehashing of a comprehensive plan for it, is in order.

In the Wild

First, Clio Chang at The Century Foundation has written a wonderful piece about child benefits, including details from United Kingdom's recent child benefit expansion that I was not previously aware of.

Second, Lauren E. Jones, Kevin S. Milligan, and Mark Stabile have a paper that uses household consumption surveys and geographic benefit disparities to determine how child benefit money is spent in Canada. For low-income families, they observe increases in expenditures on food, child care, transportation, education, and computer equipment. They also observe overall decreases in alcohol and tobacco consumption. This squares with similar studies conducted in the UK.

Third, Anthony B. Atkinson includes the creation of a universal child benefit in his forthcoming book Inequality: What Can Be Done? I have not read the book, but reviews of it indicate that he lists the child benefit as one of his fifteen proposals.

A Child Benefit Plan

While a universal child benefit program may seem like a bold proposal, it is far from it. Similar programs exist throughout the world and it could easily be implemented here. In fact, you could even implement it without raising tax rates much and while greatly simplifying the tax system. Here's one way to do it using 2013 figures sourced from the Tax Policy Center and the Joint Committee on Taxation.

  1. Provide $300 per child every month to every family. Cost: $265 billion.
  2. Eliminate the Child Tax Credit. Save: $54 billion.
  3. Eliminate the Dependent Exemption. Save: $40 billion.
  4. Eliminate the Head of Household Filing Status. Save: $6 billion.
  5. Eliminate the Child and Dependent Care Tax Credit. Save: $4 billion.
  6. Eliminate the Mortgage Interest Tax Deduction. Save: $70 billion.
  7. Eliminate the capital gains exclusion on home sales. Save: $24 billion.
  8. Eliminate the deduction for property taxes. Save: $27 billion.
  9. Reform the Earned Income Tax Credit. Save: depends.
  10. Bump marginal tax rates to make up rest of cost.

The universal $300 child benefit would be administered by the Social Security Administration, which is convenient because they are experts at sending out monthly checks and one of the first things you do when you have a kid is register them with the SSA. The gross cost of the benefit would be $265 billion, or 1.6% of GDP.

To offset the costs, we first eliminate existing tax-based child benefits (items 2 through 5). These benefits are strangely duplicative, complicated, and manage to keep child benefits away from those who need them the most.

Second, we eliminate the rich homeowner welfare state (items 6 through 10). The only way to get these benefits is if your income is already so high that you itemize your deductions. This means not only do the benefits flow almost entirely to the rich (which is bad), but also that they probably do very little at the decisional margin to promote homeownership. In fact, the people at the homebuying decisional margin (middle quintile young families) are likely to be better helped by the child benefit than homeowner tax credits they either don't claim or get relatively little from.

In total, items 2 through 10 save $225 billion, leaving us $40 billion short of the $265 billion cost, or 0.25% of GDP short.

To partially cover the $40 billion shortfall, and to rationalize the EITC with the new benefit regime, we'd also reform the EITC so that it provides the same benefit to all qualifying workers regardless of how many children they have. That is, we'd replace this mess with a single line that goes up and then down in a trapezoid shape.

Note that this would also have the effect of extending the EITC to childless workers, a bipartisan concern of late. How much this reform would save depends on where you ultimately draw that line.

Finally, whatever is left to make up after the EITC savings could easily be generated by slight increases in marginal income tax rates or some other mix of slight tweaks (e.g. to personal exemptions) in the tax code.

Of course, I don't expect this plan to pass Congress any time soon, but my point here is simply to observe that you could actually do this sort of thing, if you really wanted to. It's a reform that primarily just consists of erasing certain parts of the tax code, slightly rewriting the EITC part of the tax code, and gearing the SSA up to add children to its existing old age, disability, and survivor's transfer income system. This is the sort of distributive policy we would be pursuing if we were serious about strengthening families, supporting children, and cutting poverty, child poverty especially.