Gop’s Per-Child Tax Credit Binds Diverse Allies, Angers Economists

It is touted as a premier example of family-friendly tax relief, a Republican plan to give households a welcome break for the expense of bringing up children.

Yet the GOP’s proposed $500-per-child tax credit, now embroiled in budget talks between Congress and the White House, finds few friends among economists. Asked about it, many experts on economic policy roll their eyes with bewilderment and even contempt.

“‘Ridiculous’ is the first word that comes to mind,” said James F. Smith, a University of North Carolina economist. “I don’t get what great national goal we achieve with this proposal.”

Smith, a free-enterprise enthusiast who would like Congress to slash the federal budget deficit rapidly, has a lot of company.

“It’s awful. It’s very negative,” said Arthur B. Laffer, an economist known for advocating other types of tax cuts in the 1980s. “It’s really bad economics. It’s bad social policy.”

The saga of the proposed tax credit illustrates in one small way how the U.S. tax code has turned into a fantastically complex mishmash of provisions that have questionable if not harmful effects on the larger economy.

Some supporters of the benefit, ranging from tax-cutting conservatives to liberal children’s advocates, have a social goal in mind: helping families afford to raise kids. Others see it as a necessary sweetener to help Americans swallow the medicine of balancing the budget.

The religious right has pushed hard for the proposal as an expression of pro-family government policy, while many contend that it is only fair for households who have the expense of children to receive a tax break.

“As a culture, we ought to do everything we can to encourage and help parents trying to raise children,” said Gary Bauer, president of the Family Research Council, a conservative group in Washington. “When parents are able to do that well, we all benefit from it.”

It is when that belief is applied to the tax code that the controversy begins.

The Republican proposal - a $500 credit for each dependent child younger than 18 - would cost the Treasury $147 billion overall by the year 2002, yet it occupies a prominent spot in the GOP plan to balance the budget by then. It would take effect in the last quarter of this year, creating a $125 credit in 1995.

Economists are skeptical for many reasons. Most believe that the tax code should be simpler, with fewer deductions and exemptions, rather than weighed down with new exemptions - however idealistic the intent. According to this widely held view, it is not the job of tax policy to favor one type of family over another.

Sooner or later, somebody will have to come up with the money to compensate for the new deduction - such as taxpayers without children. The Republican proposal would give the full benefit to married couples earning up to $110,000 per year and single parents earning up to $75,000.

“I can’t argue with people who like children. I can’t argue with people who like blondes either,” said Peter J. Klenow, an economist at the University of Chicago. But if the argument is about broad-based economic growth, he said, the goal should be fewer deductions and lower tax rates.

The proposed tax break for families with children mystifies some for another reason altogether: Unlike some policy changes, this one could strengthen the nation’s tendency to spend rather than save, a trait that most experts would like to reverse in order to spark future prosperity.

The tax code already provides an exemption - $2,500 this year - for dependent children. But because an exemption reduces taxable income rather than taxes owed, it is worth less than a tax credit of equal size.

Moreover, the tax exemption for children has eroded significantly, although it has grown with inflation since 1986. If the exemption had grown at the same rate as income since 1948, it would now be $9,657, according to researchers at the Urban Institute.

“A family with four persons doesn’t have the same ability to pay taxes as a family with two persons, and over the years that principle has been abandoned more and more,” said Eugene Steuerle, an economist and senior fellow at the Urban Institute who supports a tax credit for families with children.

Such arguments - which Steuerle made as a Treasury Department official in the 1980s - helped persuade Ronald Reagan to support doubling the dependent exemption during his presidency. But pro-family advocates have argued that the doubling was not enough.

This year, the Clinton administration proposed a tax credit for families with children under 13.