Families With Children Often Pay Less In Taxes Than Their Childless Peers, But Policymakers Could do More
In a 2021 interview, Republican Vice Presidential candidate JD Vance indicated that families with children should pay less in taxes than childless taxpayers at the same income level. The thing is, they often already do, thanks to numerous tax benefits available to them like the earned income tax credit (EITC), the child tax credit (CTC), the child and dependent care credit and tax-advantaged accounts for employer-provided child care in addition to head of household filing status.
But some of those benefits, like the CTC, are unavailable to many families in need.
This week, the Senate will take a procedural vote on a tax bill drafted by Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Committee Chair Jason Smith (R-MO) that starts to close the gap in benefits between low and higher income families with children. The bill would modestly expand the CTC for many low-income families with children while preserving business tax breaks set to expire under the 2017 Tax Cuts and Jobs Act (TCJA). It passed the House in January but has been stuck in the Senate.
So how do tax benefits lower the tax bills of families with children? Here’s an example:
Take a married couple with a combined income of $100,000 and no kids. If they had a relatively simple tax situation in 2023 (they took the standard deduction and earned all income from salaries), they probably paid a bit more than $8,200 in federal income taxes, or an effective tax rate of 8.2 percent on their income.
Now add two kids to their household. Because of the CTC, they could reduce their tax bill by $4,000 dollars ($2,000 per child), and they would owe about $4,200 in income taxes, for an effective tax rate of 4.2 percent. Their effective tax rate would be even lower if they were eligible for and claimed other child tax benefits, like those related to child care.
And, even when you assume that at a married couple with two children needs more resources to have the same standard of living as a childless married couple, many families, especially low- and moderate-income families, will still owe less in taxes than their childless peers.
But, while the CTC can have a large impact on reducing the taxes families with children pay, many low-income working families don’t make enough money to receive the full benefit.
Take a single parent with two kids who makes $15,000 a year—about the amount someone working full time at the federal minimum wage makes in a year. Unlike in the previous example, she doesn’t receive $2,000 per child from the CTC ($4,000 total). Instead, she will receive less than half as much—$1,875 in 2023. The Wyden-Smith tax bill tries to temporarily close this gap, in part by adjusting the credit so it’s larger for low-income families with more than one child. If Wyden-Smith were enacted, this parent’s child credit would increase to $3,600 in total in 2023.
If, as expected, the Senate procedural vote fails, a new presidential administration and Congress will still have to address issues with child tax benefits because the TCJA’s changes—mainly expanding the CTC while repealing the personal exemption—are set to expire in 2025. Many Democrats would prefer to make the CTC bigger for the lowest income families, like they did in 2021 with American Rescue Plan Act (ARP).
As my Urban Institute colleagues have highlighted, investing in low-income families with children, including by expanding tax credits like the CTC, doesn’t just help those families but can have huge payoffs for our nation as a whole.
Policymakers might also consider simplifying child tax benefits so it’s easier for families to apply for and receive them. Each child-related tax benefit has its own set of eligibility rules and formulas. On their own, each provision’s eligibility rules are complex, and the US Treasury Department has routinely acknowledged that complexity is a major factor in the amount of benefits taxpayers claim in error.
But combined, complex rules can make the tax code a labyrinth for families to navigate, with a child eligible for one benefit, but ineligible for another.
Many families with children already pay lower taxes than similarly situated families without children. But if Senator Vance wanted to further lower the tax rates of families with children, there are a variety of options and approaches he could consider.
