A Tax Proposal for Working Families with Children

Executive Summary

How much and where to cut taxes was hotly debated during the 2000 presidential campaign. This debate is likely to continue as the 107th Congress considers the President’s across-the-board tax cut proposal and alternatives to it. In this brief, we suggest a tax proposal that builds on one of President Bush’s key ideas – an expanded tax credit for families with children – but modifies it in ways that might prove more acceptable to Democrats. Our analysis shows that it is possible to provide significant and broad-based tax relief to families with children in a way that is more progressive than the President’s plan and that encourages work and marriage, thereby reducing the toll on the road to the middle class. The cost of the proposal is roughly $400 billion over 10 years, leaving room for other tax measures to be added to the package or for some portion of projected surpluses to be used for debt reduction. Whether this idea or others will find a receptive audience in the new Administration or the new Congress remains to be seen.

One of the closest and most contentious presidential elections—and one of the slimmest congressional margins—in American history has left many skeptical as to whether there is any real prospect for constructive dialogue in Washington. These divisions could serve to heighten the level of partisanship and lead to legislative gridlock. Many observers, however, remain optimistic that President Bush and the new Congress will work together to develop an agenda that occupies the middle ground.

In the search for that middle ground, many ideas will likely bid for attention. After describing President Bush’s tax plan and some earlier Democratic proposals designed to improve the economic fortunes of families raising children, we attempt to meld the two into a proposal that borrows something from both. In brief, this proposal builds on the President’s plan to double the child tax credit from $500 to $1,000 per child. But, in deference to Democratic concerns about fairness, it allows those with limited incomes—and thus limited tax liabilities against which to claim the credits—to receive some benefits as well.


Making tax credits refundable is controversial. Many Republicans, in particular, are likely to label it as social welfare by another name. Democrats will point out that, without some refundability, income tax cuts do little to help many Americans. For example, a two-parent family with three children will not benefit fully from President Bush’s child tax credit until its income exceeds $42,000. Moreover, almost a third of families with children would be completely unaffected by the child tax credit expansion. The only way to help such families is to reduce payroll taxes or to provide refundable credits. As Congress considers a tax cut this year, we expect these issues to be vigorously debated. This brief provides some background for the debate, including an analysis of the overall costs and distributional implications of several possible proposals.