Current Status Of The Economy And The Effects It Has On Child Care Enrollment

President Obama's budget proposes to increase the child and dependent care tax credit for low- and middle-income families. The economy could use a tax cut to help it recover, but increasing this credit would do nothing to encourage growth.

The credit also discriminates among families with comparable incomes and work effort simply on the basis of their decision to use or not use paid day care providers. Increasing the credit only worsens the unfair treatment.

Discriminates Among Working Families

The child and dependent care credit is currently based on a sliding scale. Taxpayers with adjusted gross income (AGI) below $15,000 multiply their out-of-home child and dependent care expenses by 35 percent. The percentage that taxpayers can claim declines iteratively to 20 percent for taxpayers with AGI up to $43,000 and remains there for everyone above. The maximum expenses any taxpayer can claim are $3,000 for one child or up to $6,000 for two or more children. President Obama would nearly double the percentage of child and dependent care expenses that taxpayers with AGI up to $85,000 could claim. This plan is similar to the one proposed by President Clinton in 1998, and the same criticisms apply today.

To qualify for this credit, parents must pay someone else to care for their children. Parents who make different arrangements cannot claim the credit. These include families in which parents split shifts, as well as families where one parent foregoes wage income entirely in order to stay home and raise the children. The variety of child care arrangements among U.S. families is great. Tax relief for families with children is a need that can be addressed in many ways as well, but whatever way is chosen should be equitable to all families and all work-family time options. The child and dependent care credit provides a benefit only for families that choose to pay for child care outside the home. President Obama's plan to increase the credit only makes the failure greater.

Playing Favorites

The credit is also bad tax policy, because the tax code should not be used to curry political favor with particular groups or to reward taxpayers that engage in behavior or activities Washington deems beneficial. Unfortunately, the tax code is already rife with provisions that do so. Expanding the credit only adds to this growing problem.

Using the tax code in such ways often leads to damaging unintended consequences. Taxpayers alter their behavior to benefit from the favorable provisions, and new special interest lobbies form to ensure that the tax break remains entrenched in law. And doling out favors through the tax code results in those without strong representation in Washington—or those not part of a politically coveted group—paying higher taxes.

The Obama Administration has already succeeded in expanding other credits that benefit politically valuable groups as part of the stimulus package. It created the new Making Work Pay Credit that was also focused on middle- and low-income families[4] ...