Going Dutch, child subsidy style

Over at The Week, I have a piece arguing that the policy reasoning that leads Sen. Marco Rubio to endorse converting the Earned Income Tax Credit into a biweekly/monthly wage supplement also ought to support shifting the Child Tax Credit to a periodic child allowance:

[T]here’s no reason to stop at the EITC. We could likewise convert the Child Tax Credit into a series of periodic direct cash payments to families. This would ensure that the childcare subsidy syncs with family expenses throughout the year, rather than arriving as a lump sum.

A few qualifiers to this claim are in order, however. I made the argument near entirely based on conservative policy proposals mainly to highlight the room for bipartisan coalescence on this issue: that conservative desire for efficient and effective support for families and work converge with liberal preferences for direct government payments to promote income security.

But it’s not clear that conservative enthusiasm for expansions of the Child Tax Credit (like the increase to $3,500 per child that Sen. Mike Lee proposes) would entirely translate to equivalently valued direct subsidy payments. It’s not entirely clear why. As I detail, there are clear efficiency gains from shifting toward a periodic payment system. But conservatives nonetheless traditionally favor tax credits based on a distinction between government spending and tax benefits that is increasingly illusory.

I also probably stretch the limits of conservative policy preferences by suggesting that a child allowance might be means tested to provide greater support for low-income families. I’ll add, however, that such a program could mirror the phaseout scheme of the EITC, which conservative politicians like Rubio and wonks like Reihan Salam seem to largely support.

But conservatives often worry about bad incentives on work. Ross Douthat favors an inversely means-tested (liberals might call it regressive) child subsidy, arguing that when it comes to the subsidy’s impact on work, “a child benefit whose value actually increases as you move from the bottom income quartile to the second one might have a much more beneficial impact.”

Conservatives raise important concerns about unintended bad incentives by creating higher effective marginal tax rates. Winding down benefits like child subsidies theoretically erodes some of the value gained from rising up the income ladder, adversely effecting one’s willingness to put in the extra work.

But liberals tend to believe that these bad incentives are muted at the lowest quintiles of our income distribution. Low-income families are concerned primarily about simple economic survival. Every extra dollar counts, and any opportunity to rise up the economic ladder will be seized. The weaning of means-tested benefits, the thinking goes, will have less of an effect on these families’ work decisions than conservatives fear.

Moreover, a carefully designed phaseout of a means-tested child subsidy like that used for the EITC can further minimize any adverse work incentives. By gradually phasing out, the EITC avoids benefit cliffs that might legitimately counteract income gains by low-income workers.

So the compromise position – between the liberal preference for means-testing and the conservative preference for inverse means-testing – is a flat benefit for all families like that used in the Netherlands. But as I explain, even this requires increasing refundability of the child subsidy and (ideally) increasing the value of the subsidy itself. Sen. Lee has proposed something along these lines for the Child Tax Credit at least, suggesting we raise the value of the credit to $3,500 and make it more refundable by counting both payroll and income taxes.

But all of this raises the biggest question of all: how to pay for it. Lee’s proposal raises objections from the left because it is paid for significantly by low-income workers (the type of policy that Douthat endorsed). Raising the value of the child subsidy – through full refundability and total value increases – would likely need to be paid for by raising taxes somewhere. Liberals would default to raising taxes on high-income earners, perhaps justifiably so. But on this point, conservatives would almost certainly part ways.

All of these are tricky practical questions that need to be sorted out. But they are worth exploring and negotiating. The openness of the right’s reformers to wage supplements and child allowances is an encouraging sign that conservatives are re-entering the realm of constructive policy proposals. The instincts here are right, and there ought to be room for real bipartisan cooperation.