In the spring of 1970, Congress had dueling basic income proposals to consider: a basic income for needy families from President Richard Nixon, and a basic income for children from Senator George McGovern. The congressional debate over these plans provides an intriguing historical evaluation as we once again explore ways to provide income security to more Americans in the twenty-first century.
During March of 1970, the Senate Select Committee on Nutrition and Human Needs held hearings ostensibly on “Hunger and the Income Gap.” Instead, the hearings quickly veered into the merits of the basic income proposals on the policy table. The committee, which was chaired by McGovern and included Republican senators Bob Dole and Jacob Javits, elicited testimony from prominent witnesses like Rev. Jesse Jackson and New York mayor John Lindsay.
As McGovern eyed a run against Nixon two years later, he was eager to elicit testimony contrasting his child allowance plan from Nixon’s basic income proposal. Several participants found Nixon’s $1,600 basic income for needy families to be unduly stingy. Others took issue with the failure of Nixon’s plan, which included a work requirement, to specify exactly what kind of work beneficiaries would be required to perform.
But much of the testimony centered on how to fund McGovern’s child allowance plan. There was near-unanimous agreement that the policy could be paid for by repealing the dependent tax exemption. During his testimony, Jackson asked, “Don’t the rich people have a $600 allowance tax write-off for their children?” McGovern answered, “[T]here is, as a matter of fact, a children’s allowance in the United States today written into our income tax laws, as $600 exemption. [. . .] [I]t is really a children’s allowance for the rich.”
A child allowance was seen as an equitable way of expanding the tax system’s child subsidy to all. In Lindsay’s record testimony, he said, “Of course, an essential step in creating a children’s allowance system would be to eliminate the $600 per dependent exemption . . . . Only those who earn enough to pay taxes now benefit from this form of a children’s allowance. Those who are poor receive no benefits at all.”
McGovern himself fleshed out the distributional impact of his child allowance, which he thought should be taxable for higher earners. “[I]f you repealed the existing income tax exemption and made the children’s allowance taxable, 79-80 percent of the benefits . . . would go to families of $10,000 income or less,” he explained. “Under the present system, the income tax exemption is just the reverse. Most of the benefits of the income tax allowance go to families above $10,000.”
(McGovern’s explanation was a response to Senator Javits, the Republican senator from New York. Javits proclaimed himself “very favorable to children’s allowances. In my last campaign I advocated it.” Lindsay was also still a Republican until switching parties in 1971 and challenging McGovern for the Democratic presidential nomination. The child allowance was thus a bipartisan idea at the time.)
The senators and witnesses were right. We do have a child allowance in the United States—it’s just baked into the tax system. But tax exemptions inherently favor the wealthy. These reductions exempt a certain amount of income from taxation. Because the wealthy are in a higher tax bracket, they receive disproportionate benefits from the exemption.
Today, the dependent tax exemption remains a regressive tax-based child allowance. Families can exclude up to $4,000 per child in taxable income. This tax benefit costs the government more than $38 billion annually, but only 1.5 percent of the benefits accrue to the poorest 20 percent of households, while 57.1 percent accrues to the top 40 percent.
Since 1997, the United States has also had a Child Tax Credit, another $1,000 per child tax credit child allowance. The CTC lifts millions out of poverty, and is structured to be a somewhat fairer and less regressive child subsidy because a portion of it is refundable for low-income families who owe no federal income taxes.
Still, because it is not fully refundable, the CTC too tends to favor better-off families. The CTC costs the government some $60 billion per year, with the largest subsidies flowing to middle- and upper-middle class families rather than to the poor.
Each of these child tax subsidies are tilted toward the middle- and upper-ends of the income spectrum. Not only is this inequitable, but it means that public benefits aren’t being efficiently directed toward those who need them the most.
One solution is to convert all tax reductions into refundable tax credits. This would equalize the value of the subsidy across all classes of taxpayers.
But a better option is to disgorge child subsidies from the tax code entirely and use the funds spent on the CTC, the dependent exemption, and other smaller child tax credit subsidies to create a true child allowance, deposited into families’ bank accounts every month.
Researchers at The Century Foundation have calculated that the direct spending of a child allowance is a more cost effective way of slashing poverty than the CTC’s submerged tax spending. For instance, a $2,500 child allowance would cost an additional $109 billion per year and would cut child poverty by 5.1 percent. On the other hand, a $4,000 Child Tax Credit would cost an additional $101 billion per year while cutting child poverty by only 1.2 percent. This is because a child allowance would reach all families, including those with little or no income, and would thus rescue more children from deep poverty.
So the insights of McGovern, Lindsay, and Jackson remain true today. The most direct and equitable way to subsidize children is to scrap our tax reductions and create a simple child allowance.
What’s perhaps most foreign about the Senate hearings is how cavalier and casual the participants were about trashing the dependent tax exemption. Today, such a suggestion would be a virtual death knell—a nonstarter quickly blasted as a tax hike, even if the net effect of a child allowance would expand relief to many more families. In 1970, though, the right hadn’t yet succumbed to taxphobia, and no anti-tax pledge had yet gained hegemony over Republicans in Congress. There was more political space to imagine different and more efficient ways of doing things.
Instead, in looking back at these hearings forty-six years later, it’s striking to see senators and witnesses alike honestly searching for the best solution. We might face different resistances today, but we’d be wise to relearn what we knew then. A child allowance is needed just as urgently today as it was in 1970.