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This blog post is part of a series dedicated to analyzing the impact of the Tax Cuts and Jobs Act. Click here to see all of the blogs in the #TCJANowWhat series.
There is currently a debate among policy analysts and commentators about whether the Tax Cuts and Jobs Act of 2017 (TCJA) was “pro-family.” Even casual observers of the tax code recognize provisions that are pro-family or “family-friendly.” The child tax credit (CTC) likely comes to mind first, but other provisions include the adoption tax credit, the earned income tax credit (EITC), the child and dependent care credit, and various education tax credits. None of these policies make child-rearing profitable, but they do reduce tax burdens in a targeted manner — expanding over time. For example, the EITC was established in 1975 and subsequently expanded seven times, and the CTC was established in 1997 and subsequently expanded 10 times.
Some scholars argue that the TCJA reversed this trend toward pro-family tax policy. Even before the law was enacted, my AEI colleague Ramesh Ponnuru was pessimistic about families’ prospects, writing in Bloomberg in August 2017:
Since 1981, every major tax cut in the US has included tax relief targeted at parents. . . . But [today] Republican politicians aren’t nearly as enthusiastic about a larger child credit as they are about corporate-tax cuts, reductions in the top income-tax rate, and so forth. For many of them, the revenue loss from a larger child credit is money that could be used to make those other tax cuts bigger.
In the end, the TCJA included a myriad of changes affecting the tax liability of families with children. On the plus side, the CTC was expanded from $1,000 to $2,000, along with an expansion of the credit’s refundability and an increase in the income threshold before the credit begins to phase out. In addition, a new $500 credit was established for children age 17 and older. However, the deduction for personal exemptions was repealed. Moreover, other provisions provided tax relief for households with and without children, thereby potentially narrowing the tax advantage of taxpayers with children relative to childless filers.
Nevertheless, Josh McCabe, a sociology professor at Endicott College and senior fellow at the Niskanen Center, recently accused those behind the TCJA of neglecting families:
TCJA revealed what many social conservatives had already known — that business groups would be happy to sell out American families if it meant a larger corporate tax cut for themselves. And members of Congress, more concerned with financing their campaigns than serving the public who cast votes for them, would quietly oblige donors while simultaneously paying lip service to families and leaving them empty-handed.
Rhetoric aside, what is the net impact of all TCJA changes for families? To answer this, I turned to Tax-Calculator, an open-source micro-simulation tax model developed by AEI’s Open Source Policy Center (OSPC). To begin, I calculated the TCJA’s average impact on taxpayers without children and taxpayers with one, two, or three children (see Table 1).
Table 1. Tax Savings from TCJA by Household Type, 2019
As Table 1 shows, the average tax cut provided by TCJA is larger for taxpayers with children, and the tax cut increases as the number of children increases. The average tax cut is also larger for married households than for unmarried filers. Single childless taxpayers receive an average tax cut of $343, while married childless taxpayers receive an average tax cut of $1,446. Single taxpayers with one child receive, on average, a tax cut of $808, and married filers with one child receive an average tax cut of $2,330.
The results of this simple analysis clearly indicate that TCJA is family-friendly in that the average tax cut was larger for larger families. Families with three children headed by an unmarried taxpayer received three times more tax relief than a single childless taxpayer. Married taxpayers with three children received twice the tax relief of a married childless couple.
However, this simple comparison may mask the true reasons why these larger families saw bigger tax cuts, as there may be differences between these taxpayers other than number of children. For example, families with children may have different average incomes than households without children.
Table 2 provides more detailed insight into the TCJA’s effects by reporting the average savings among those in the second, third, and fourth income quintiles: the middle class. The table reports the average tax cut and change in after-tax income across eight taxpayer scenarios (single or married with zero, one, two, or three children).
Table 2. Impact of TCJA by Household Type and Income, 2019
Results generally conform to the results in Table 1 with isolated exceptions. For example, for taxpayers with adjusted gross income between $6,831 to $22,793 (the lower end of middle-class households), single taxpayers with two or three children saw an average tax cut that was lower than single taxpayers with just one child — a 0.4 to 1.2 percent increase in after-tax income versus a 2.4 percent increase. In both absolute dollars and as share of after-tax income, tax relief tends to be larger for those with higher incomes.
Do these results prove social conservative tax advocates wrong? Yes and no. On one hand, families were not left “empty-handed” and in fact do receive, on average, larger tax breaks than taxpayers without children, and married taxpayers receive larger tax cuts in dollar terms, (but not always as a share of after-tax income). On the other hand, the difference in tax liabilities among filers with children varies by less than $1,000 when comparing one-child families with three-children families, which is perhaps too modest for the pro-family tax advocacy community that had been pushing for a net tax cut of $1,500 per child (by raising the CTC from $1,000 to $2,500 without any offsetting changes).
Elaine Maag, writing recently in a blog post in this same series, focuses more narrowly on the impact of a subset of TCJA provisions that she identifies as “intending to broadly subsidize families” and finds the average net effect to be even less than the results reported above. The principal difference between the results presented here and Maag’s findings is that her work excludes the effect of TCJA’s reduction in individual tax rates on ordinary income and pass-through income. Echoing McCabe’s sentiment, she concludes, “For child advocates, [TCJA] was a missed opportunity.”
But none of the analysis — my own here and others’ — addresses the more fundamental questions of what should be the tax preference for tax filers with children and how should lawmakers balance tax breaks that reward families with tax policies that reward work or savings and investment. And are these two tax policy objectives — raising after-tax incomes for families and broadly promoting economic growth — in conflict?
I believe that tax reform can increase after-tax incomes for families without expanding targeted credits for having children. For example, while the exact magnitude can be reasonably debated, growing empirical evidence finds that the incidence of the corporate income tax falls heavily on wages. A lower corporate rate will, over time, lead to higher incomes.[1]
Admittedly, such pro-growth tax policies do not advantage parents relative to nonparents but in my view that is a feature, not a flaw. To pursue the alternative is to consider the tax code merely a means of redistributing income from the childless taxpayer to parents and will leave us all with a distorted tax base of 20-somethings and seniors.
Alex Brill is a resident fellow at the American Enterprise Institute.
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[1] For more on this point, see the recent post in this series by Glenn Hubbard.
Families were not left empty-handed by the TCJA, but the law was perhaps too modest for the pro-family tax advocacy community.
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