Should the United States Should Stop Incentivizing Childbearing with Tax Advantages?

If so, it’s not a hill we’re willing to die on.

We are often asked why we don’t lobby for an end to “government incentives for people to have children.” Some believe that the tax breaks people get in the United States might lead them to have more children than they would otherwise have, and that Population Connection should therefore work to eliminate tax breaks related to dependents.

I should say right up front that we don’t want to prevent people from having children that they desire. We work to enable people to have the number of children they want to have, when they want to have them.

And more to the point of this blog post, anyone who has children would vehemently agree that no incentive is large enough for it to be a net financial gain to have children.

But for the sake of argument, let’s go ahead and explore the tax breaks parents and legal guardians receive for their dependents:

  • In 2016, the IRS provided a $4,050 exemption for each qualifying child.
  • A new baby provided a $1,000 one-time tax credit in 2016, although it phased out as incomes rose above $110,000 on joint returns, and above $75,000 on single and head of household returns.
  • Eligibility for the Earned Income Tax Credit (EITC) is offered at higher incomes for those with children (in other words, earners that made too much money to qualify for the EITC without dependents might qualify if they had one or more dependents). For the 2016 tax year, the maximum credit was $6,269, for a married couple with three or more qualifying children. In order to receive that full credit, however, that couple’s adjusted gross income (AGI) would have to be less than $53,505.

Let’s tally up the tax savings from two extreme examples in which two couples with very different incomes delivered triplets or took in (through adoption or foster care) three children in 2016.

The couple with the lower income (less than $53,505) would benefit from these savings:

  • $12,150 exemption ($4,050 x 3)
    • Earning less than $53,505 would put them in either the 10% or 15% income bracket, meaning that their exemptions would save them either $1,215 or $1,822.50 (10% and 15% of $12,150, respectively).
  • $3,000 tax credit ($1,000 x 3)
  • $6,269 EITC

For this couple, the best-case scenario is that they save $11,091.50 in taxes averted ($1,822.50 + $3,000 + $6,269).

The wealthy couple (in the highest tax bracket of 39.6% for having a joint income of $466,951 or more) wouldn’t fare quite as well, but would still save $4,811.40:

  • $12,150 exemption ($4,050 x 3)
    • In the highest tax bracket, they would save $4,811.40 ($12,150 x 0.396).
  • No tax credit because income too high
  • No EITC because income too high

Anyone who has ever raised three children knows that it costs more than $4,811.40 or even $11,091.50 per year—and remember, $3,000 would be knocked off each of those numbers for every year after the first because the child tax credit would only applies the year the child came under the filer’s care.

In fact, the Department of Agriculture estimates that it costs between $12,350 and nearly $14,000 a year, on average, to raise a child born in 2015—that’s between $37,050 and $42,000 a year for three kids (although the estimates do assume a 24% reduction in cost per child when there are more than three, due to economies of scale). And those estimates are only through age 17—they do not consider college.

In industrial societies, children aren’t earners, except in the rarest of cases, making childbearing worthwhile for personal reasons only. The parents I know mostly say that having children is the most difficult and also the most joyous and fulfilling thing they’ve done in their lives. Not a single one of them has said that it makes any sort of financial sense.

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