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The Middle Class Parent Penalty: Child Benefits in the U.S. Tax Code

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David T. Ellwood
Jeffrey B. Liebman

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Abstract

Low-income families with children receive large tax benefits from the Earned Income Tax Credit, while high income taxpayers receive large tax benefits from dependent exemptions (whose value is greater to those in higher tax brackets). In contrast, middle-income parents receive substantially smaller tax benefits associated with children. This U-shaped pattern of benefits by income, which we call the middle-class parent penalty,' not only raises issues of fairness; it also generates marginal tax rates and marriage penalties for moderate income families that are as high or higher than those facing more well-to-do taxpayers. This paper documents how the tax benefits of children vary with income, and illustrates their impact on marginal tax rates and marriage penalties. It then examines five options for reducing or eliminating the middle-class parent penalty and the high marginal tax rates and marriage penalties it produces.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8031.

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Date of creation: Dec 2000
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Handle: RePEc:nbr:nberwo:8031

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Find related papers by JEL classification:
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
J12 - Labor and Demographic Economics - - Demographic Economics - - - Marriage; Marital Dissolution; Family Structure

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Rebecca M. Blank, David Card and Philip K. Robins, 1999. "Financial Incentives for Increasing Work and Income Among Low-Income Families," Economics Working Papers E99-264, University of California at Berkeley. [Downloadable!]
    Other versions:
  2. Bruce D. Meyer & Dan T. Rosenbaum, 1999. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," NBER Working Papers 7363, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Nada Eissa & Hilary Williamson Hoynes, 1998. "The Earned Income Tax Credit and the Labor Supply of Married Couples," NBER Working Papers 6856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Jeffrey B. Liebman, 1998. "The Impact of the Earned Income Tax Credit on Incentives and Income Distribution," NBER Chapters, in: Tax Policy and the Economy, Volume 12, pages 83-120 National Bureau of Economic Research, Inc. [Downloadable!]
  5. Daniel R. Feenberg & Harvey S. Rosen, 1995. "Recent Developments in the Marriage Tax," NBER Working Papers 4705, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Eissa, Nada & Liebman, Jeffrey B, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 605-37, May. [Downloadable!] (restricted)
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  7. James Alm & Stacy Dickert-Conlin & Leslie A. Whittington, 1999. "Policy Watch: The Marriage Penalty," Journal of Economic Perspectives, American Economic Association, vol. 13(3), pages 193-204, Summer. [Downloadable!] (restricted)
  8. Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1.
  9. William M. Gentry & Alison P. Hagy, 1996. "The Distributional Effects of the Tax Treatment of Child Care Expenses," NBER Chapters, in: Empirical Foundations of Household Taxation, pages 99-134 National Bureau of Economic Research, Inc. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mike Brewer & Paul Gregg, 2001. "Eradicating child poverty in Britain: welfare reform and children since 1997," IFS Working Papers W01/08, Institute for Fiscal Studies. [Downloadable!]
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