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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

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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Bibliographic Info

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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Publication status: published as The Middle-Class Parent Penalty: Child Benefits in the U.S. Tax Code , David T. Ellwood, Jeffrey B. Liebman. in Tax Policy and the Economy, Volume 15 , Poterba. 2001
Handle: RePEc:nbr:nberwo:8031

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  1. Bruce D. Meyer & Dan T. Rosenbaum, 1998. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," JCPR Working Papers 32, Northwestern University/University of Chicago Joint Center for Poverty Research.
  2. Rebecca M. Blank & David Card & Philip K. Robins, 1999. "Financial Incentives for Increasing Work and Income Among Low-Income Families," JCPR Working Papers 69, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1, July.
  4. N. Eissa & H. W. Hoynes, . "The Earned Income Tax Credit and the Labor Supply of Married Couples," Institute for Research on Poverty Discussion Papers 1194-99, University of Wisconsin Institute for Research on Poverty.
  5. 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.
  6. Nada Eissa & Jeffrey B. Liebman, 1995. "Labor Supply Response to the Earned Income Tax Credit," NBER Working Papers 5158, National Bureau of Economic Research, Inc.
  7. Daniel R. Feenberg & Harvey S. Rosen, 1994. "Recent Developments in the Marriage Tax," NBER Working Papers 4705, National Bureau of Economic Research, Inc.
  8. 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.
  9. William M. Gentry & Alison P. Hagy, 1995. "The Distributional Effects of the Tax Treatment of Child Care Expenses," NBER Working Papers 5088, National Bureau of Economic Research, Inc.
  10. Steuerle, C Eugene, 1990. "Tax Credits for Low-Income Workers with Children," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 201-12, Summer.
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Cited by:
  1. Mike Brewer & Paul Gregg, 2002. "Eradicating Child Poverty in Britain: Welfare Reform and Children Since 1997," The Centre for Market and Public Organisation 02/052, Department of Economics, University of Bristol, UK.
  2. Artheya, Kartik & Reilly, Devin & Simpson, Nicole B., 2014. "Young Unskilled Women and the Earned Income Tax Credit: Insurance Without Disincentives?," Working Paper 14-11, Federal Reserve Bank of Richmond, revised 01 Jun 2014.
  3. Nicole Simpson & Devin Reilly & Kartik Athreya, 2010. "The Earned Income Tax Credit: Insurance Without Disincentives?," 2010 Meeting Papers 1103, Society for Economic Dynamics.
  4. Athreya, Kartik & Reilly, Devin & Simpson, Nicole B., 2014. "Single Mothers and the Earned Income Tax Credit: Insurance Without Disincentives?," IZA Discussion Papers 8114, Institute for the Study of Labor (IZA).
  5. Gregory Acs & Eric Toder, 2007. "Should we subsidize work? Welfare reform, the earned income tax credit and optimal transfers," International Tax and Public Finance, Springer, vol. 14(3), pages 327-343, June.
  6. Robert Fenge & Wolfgang Ochel, 2001. "Die Vereinbarkeit von Familie und Beruf: der Schlüssel für eine kinderreiche Gesellschaft," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 54(12), pages 17-29, November.
  7. Simpson, Nicole B., 2013. "Families, Taxes and the Welfare System," IZA Discussion Papers 7369, Institute for the Study of Labor (IZA).

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