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

In: Tax Policy and the Economy, Volume 15

  • David T. Ellwood
  • Jeffrey B. Liebman

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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This chapter was published in:
  • James M. Poterba, 2001. "Tax Policy and the Economy, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number pote01-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10853.
    Handle: RePEc:nbr:nberch:10853
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    1. 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.
    2. Nada Eissa & Jeffrey B. Liebman, 1996. "Labor Supply Response to the Earned Income Tax Credit," The Quarterly Journal of Economics, Oxford University Press, vol. 111(2), pages 605-637.
    3. 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.
    4. Nada Eissa & Hilary Williamson Hoynes, 2000. "The Earned Income Tax Credit and the Labor Supply of Married Couples," Public Economics 9912001, EconWPA.
    5. Stephen V. Cameron & James J. Heckman, 1999. "The Dynamics of Educational Attainment for Blacks, Hispanics, and Whites," NBER Working Papers 7249, National Bureau of Economic Research, Inc.
    6. 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.
    7. Mitrusi, Andrew & Poterba, James M., 2000. "The Distribution of Payroll and Income Tax Burdens, 1979-99," National Tax Journal, National Tax Association, vol. 53(n. 3), pages 765-94, September.
    8. Susan Dynarski, 2000. "Hope for Whom? Financial Aid for the Middle Class and Its Impact on College Attendance," NBER Working Papers 7756, National Bureau of Economic Research, Inc.
    9. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers," The Quarterly Journal of Economics, Oxford University Press, vol. 116(3), pages 1063-1114.
    10. 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.
    11. Martin Feldstein & James M. Poterba, 1996. "Empirical Foundations of Household Taxation," NBER Books, National Bureau of Economic Research, Inc, number feld96-1.
    12. Whittington, Leslie A & Alm, James & Peters, H Elizabeth, 1990. "Fertility and the Personal Exemption: Implicit Pronatalist Policy in the United States," American Economic Review, American Economic Association, vol. 80(3), pages 545-56, June.
    13. Feenberg, Daniel R. & Rosen, Harvey S., 1995. "Recent Developments in the Marriage Tax," National Tax Journal, National Tax Association, vol. 48(1), pages 91-101, March.
    14. 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.
    15. Andrew Mitrusi & James Poterba, 2000. "The Distribution of Payroll and Income Tax Burdens, 1979-1999," NBER Working Papers 7707, National Bureau of Economic Research, Inc.
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