Making Policies for Children A Study of the Federal Process (1982) / Chapter Skim
Currently Skimming:
The Child Care Tax Deduction/Credit
The Child Care Tax Deduction/Credit
Pages 206-265
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 206... ...
Warring INTRODUCTION The child care tax deduction/credit originated in 1954 as an itemized deduction for work-related day care expenses. It was limited to $600 and to households in which both the husband and wife worked and that had an adjusted gross income of $4,500 or less.
|
From page 207... ...
This case study examines each of these four major revisions in the child care deduction/credit. In many respects the subject of this study represents a different genre from the other two cases.
|
From page 208... ...
These adjustments are "above-line" and open to all eligible taxpayers regardless of whether they elect the standard deduction or itemize. After calculating the adjusted gross income a taxpayer can either take a fixed standard deduction (now referred to as the "zero-bracket amount")
|
From page 209... ...
. THE ORIGINS OF THE CHILD CARE DEDUCTION In 1861 the federal government levied the first tax on individual incomes to raise urgently needed revenue for the Civil War .2 Until that time customs duties, excise taxes, and land sales provided all federal tax revenues.
|
From page 210... ...
It allowed deductions for interest on debts, nonincome tax payments, and business expenses. State and local government employees were exempted from paying the tax; the interest on federal, state, and local government bonds was also exempt.
|
From page 211... ...
As one might anticipate, the child care deduction ignited some controversy in Congress. The issue of a child care deduction was not new.
|
From page 212... ...
Like personal deductions, business expenses were as much a matter of fiat as principle. No single consideration readily explains why members of Congress and the administration proposed a child care deduction in the 1954 code.
|
From page 213... ...
Business expenses, as adjustments to gross income, were deducted before personal items, thereby reducing the taxpayer's liability regardless of whether he or she took the standard deduction. If the child care deduction were incorporated as a business expense, then the qualified population would include all otherwise eligible taxpayers with a dependent, whether or not they itemized their returns.
|
From page 214... ...
The association added that expenses such as alimony and entertainment, currently deductible under this principle, were more in the nature of personal expenses than are the payment of wages for services to a custodian of one's child.8 Representatives in Congress echoed the belief that a child care deduction was consistent with the principles of a business deduction. Many of their arguments, moreovery stressed not only the equitable nature of the deduction, but also that a failure to enact the provision would prove discriminatory and inhumane.
|
From page 215... ...
Representative James Davis of Georgia observed that "this nation spends hundreds of millions of dollars each year for child welfare, aid to dependent children, etc., but when a mother has the courage to support her children by working rather than accepting government aid, she is penalized by the law." Others praised the working mother for her "courage" and "independence" in working when the cost of day care rendered it more lucrative to stay home "in idleness and rely on the country welfare board to take care of her." The child care deduction, Davis emphasized, would guarantee working parents the
|
From page 216... ...
Representative Roberts explained that "the present inequitable tax law has an adverse effect on the welfare of the country by making it difficult to keep women in the fields of teaching and nursing where a critical labor shortage exists." These jobs were underpaid to begin with, and "nondeductible child care expenses" made it "hardly worthwhile for these women to continue to work once they have families."~5 The American Hospital Association and the American Nurses Association agreed. The nurses association contended that although more nurses were working in 1954 than at any other time, a critical shortage of nursing services in cities and rural areas still existed.
|
From page 217... ...
Representative Noah Mason of Illinois did not want to give the deduction to the kind of mother who might neglect her responsibilities to her family in order to earn some extra spending money. As he saw it, the problem in drafting the child care deduction was to draw a line "between those women who have to work, are compelled to work because their husbands do not care enough, or because they are unable to earn money or incapable of earning it, and those women who want to work to earn extra money to buy things they want that their husbands cannot afford to buy them."t 7 In congressional considerations of the child care deduction a tension surfaced between those who viewed women as working individuals and taxpayers and those who viewed women as mothers -- sentinels of home and family.
|
From page 218... ...
raised several major questions concerning the child care deduction. The report expressed concern over the number of taxpayers eligible for the deduction and consequent revenue loss.
|
From page 219... ...
When passed by the House as part of the general tax revision measure, the child care deduction (Section 214) conformed substantially to the administration's proposal.
|
From page 220... ...
8300 in early April 1954, the Senate Finance Committee held extensive hearings on the general topic of tax revision. Little, however, was heard from those concerned with the child care deduction in particular.
|
From page 221... ...
The House version of child care deduction would have meant $40 million in revenue losses in fiscal 1955 and would have benefited approximately 300,000 taxpayers; the final version was estimated to cost $140 million and to benefit potentially 2.1 million taxpayers. When enacted, Section 214 contained measures associated with business deductions on one hand and measures that stressed the personal nature of child and dependent care expenses on the other.
|
From page 222... ...
The President signed the new tax code, child care deduction and all, into law in 1954. IMPACT AND REVISION: 1954-1964 The child care deduction brought much less tax relief than Congress had estimated.
|
From page 223... ...
Under the rubric of removing inequity and hardship, he recommended a liberalization or the child and dependent care deduction.2 7 The President's proposal on the child care deduction was in large measure shaped by the recommendations of his Commission on the Status of Women.28 Created by executive order in December 1961, the commission received a broad mandate to explore virtually all social and economic issues affecting women. Chaired by Eleanor Roosevelt and Assistant Secretary of Labor Esther Peterson, the commission included cabinet heads, members of Congress, and civic, labor, and business leaders.
|
From page 224... ...
They recommended allowing the deduction of child care expenses if the mother were confined to an institution. The problem they encountered was the technical difficulty of defining a noninstitutionalized spouse's "incapacity" to care for her children.
|
From page 225... ...
Although the committee lamented that so many women had been n forced by economic necessity or by the regulations of welfare agencies" to work despite the presence of young children, they affirmed the right of all women who elected to work to have child care services available .3 ~ care Even on the part of the commission's committees, the tenor of the discussion on reform of the child care deduction retained the traditional perception of the tax measure as justified chiefly by economic necessity. While expressing the belief that child care services should be available and accessible to all women who choose to work, the committee on home and community found it, nonetheless, "regrettable" that women with very young children sought employment.
|
From page 226... ...
Finally, Dillon recommended that the deduction for child care expenses be extended to a married man with an institutionalized wife. He argued that these circumstances were comparable to those of a widower who was allowed the deduction under current law .3 2 Offering a different, though not unprecedented rationale, Secretary of Labor Willard Wirtz also testified for the liberalization of the child care deduction.
|
From page 227... ...
n Members simply wished to avoid any tax incentives for mothers to seek employment.3 7 The committee's final bill excluded most of the President's major recommendations with respect to the child care deduction. The committee did raise the limit of the deduction from $600 to $900 if the taxpayer had two or more eligible dependents, but refused to increase the income ceiling of $4,500 on dual-career families.
|
From page 228... ...
The House passed their tax bill without amendment.38 Since the House bill incorporated most of the major tax reductions sought by the administration, Treasury was unwilling to challenge the measure over the relatively minor issue of the child care deduction. It was not politic to risk alienating the Ways and Means Committee in a Senate battle over the deduction's provisions; the administration proffered only tacit support.39 Several senators, however, were determined to see the administration's and the commission's proposals realized.
|
From page 229... ...
Nevertheless, the changes made by the Finance Committee added $15 million to the estimated revenue loss of the House bill and 200,000 taxpayers to the universe of those eligible. The new totals were $20 million and 444,000 taxpayers.
|
From page 230... ...
Nevertheless, the low income ceiling and limit on the amount deductible made the child care deduction of little value in an era of rapidly rising incomes. To deal with this situation, members of Congress introduced 15 bills to increase the amount of the allowable deduction, 9 to raise the income ceiling, 5 to raise the age of children qualified to receive care, 5 to change child care expenses from a personal to a business deduction, and 2 to remove all restrictions on marital status.
|
From page 231... ...
A mother on the "Today" show raised a classic example of the tax law's inequity: If David Rockefeller could deduct as a business expense the salary of a secretary, why shouldn't every working mother be able to deduct the cost of hiring someone to take care of her house and children while she was at workers Much of the rationale for enacting amendments to the child and dependent care deduction recapitulated past arguments. Some argued that the hardships of working mothers were not adequately redressed by the 1964 revision.
|
From page 232... ...
Men, the traditional breadwinners, had benefited the most from the business deduction; for women, whose traditional responsibility was the care of their children, the child care deduction offered a social equivalent. Child care expenses were as "ordinary and necessary" to a working mother as lunches, sales trips, etc., were to a working man.
|
From page 233... ...
''49 This task force u1a not make any specked r=~llul`~l~ations with respect to the child and dependent care deduction. The issue of choice, however, became central to the council's deliberations.
|
From page 234... ...
The $600 deduction was worth only $84 for a taxpayer in a 14 percent income bracket and $120 for one in a 20-percent bracket.5~ In its report task force members extended their analysis of the effect on the deduction on low-income families. The number of taxpayers filing the deduction for child and dependent care expenses in 1966 revealed a decrease in the deduction's utility to low-income families.
|
From page 235... ...
The deduction was inadequate compensation for these women. Chairman Russell Long of the Senate Finance Committee proposed a bill, the Child Care Services Act of 1971, which represented an amalgam of divergent interests concerned with the child care deduction.55
|
From page 236... ...
With the exception of the child care deduction, however, all of the provisions in his child care services bill were targeted solely for welfare recipients and low-income working women.5 7 The Finance Committee used Long's bill as a vehicle to overhaul the entire deduction. They incorporated the deduction into the Revenue Act of 1971 and renamed it the "job development deduction" for household services and child care.
|
From page 237... ...
Senator John Tunney argued that child and dependent care expenses should be allowed as a business deduction. Furthermore, it would make the deduction available to those families that did not itemize their tax returns.
|
From page 238... ...
"[I] wonder when we will reach the point where we consider that we must be responsible as well as generous." Senator John Pastore was quick to respond: "Every time we talk about little children and retarded children, we start to talk about how much money we will toss away." Tunney's amendment passed by a vote of 74 to 1.6~ On November 15, 1971, three days after the child and dependent care deduction had been transformed into a business deduction for job development, Tunney offered a second amendment to the bill.
|
From page 239... ...
Such a justification seemed satisfactory to other senators as well, as Tunney's second amendment passed by a vote of 59 to 24 ·6 5 The Tunney-Long amendment changed one of the central purposes of the deduction to the employment of low-income and welfare mothers rather than the relief of child care expenses they incurred in working. Tunney's amendments also came closer to a second, implicit purpose of the deduction: that all mothers should be allowed the choice of working and the costs for care of their children should be legitimate business expenses.
|
From page 240... ...
This increase, the analysis concluded, was not enough to compensate for the revenue loss of the bill. In addition, the deduction opened opportunities for individuals on welfare in deadend jobs, thus undermining the usual objective of federal programs to place welfare recipients in promising occupations .6 7 The department also objected to Tunney's amendment to raise the income limitation of married couples on the grounds that the government should not subsidize dependent care expenses when the family had the means to pay for such care.
|
From page 241... ...
In sum, the Treasury recommended that the Senate's bill be changed to reduce the revenue loss from $315 million to $100 million. The department suggested that child care and dependent care expenses remain an itemized deduction, that the income limitation for married taxpayers be set at $12,000, and that the income limitation be established for single taxpayers.
|
From page 242... ...
Finally, the critics assailed the deduction's failure to include payments to relatives for child care services as allowable expenses. This failure further limited the ability of the poor to deduct their care expenses and unjustifiably restricted a taxpayer's choice of employees.7~ Academic analysis of the deduction was virtually unknown prior to the 1971 revision.
|
From page 243... ...
Their numbers had not been "significant" and they had not yet organized "to make their presence felt." Since 68 percent of the families earning $10,000 or less use the standard deduction form, these families "who most need and deserve assistance from tax relief" did not receive the benefit of the child care deduction. "This is," he believed, "an inequity which must be removed." - -- ~~ ~~ ~ "~^~~^~~' _ 1 L Wd:~ LIVE ~ ~ main ~ expense" to make "sure your child is safe while you are away all day earning enough to keep your family together.
|
From page 244... ...
There is not a thing here about child care." Bennett retained the idea that the child care deduction was only legitimate as a hardship provision. Changing the deduction into an "above-line" item would effectively remove the $18,000 income ceiling and extend benefits to individuals who, he believed, did not need them.7 4 Despite Bennett's objections, Tunney's amendment passed the Senate by 71 to 8.
|
From page 245... ...
Under the rubric of simplification it proposed to eliminate three of the most complex elements: the distinction between in-home and out-of-home care, the requirement of a monthly calculation of expenses, and the disability income formula for reducing the allowable deduction.7 6 In response to the continued congressional proposals and the Treasury's administrative concerns, the staffs of the Joint Committee on Taxation and the Office of Tax Policy met to work out a set of revisions in drafting a 1974 tax reform measure. Under Laurence N
|
From page 246... ...
Moreover, Woodworth rejected the idea that this revision "would increase the availability of child care services." Relatives receiving payments "would probably care for the children even if there were no payment or deduction."~° Ways and Means reported out their tax reform bill with a limited revision of the child care deduction in December 1974. Several events, however, intervened and the bill never reached the floor.
|
From page 247... ...
Russell Long, however, persuaded Tunney to hold his measure until the Finance Committee reported the House bill and then introduce a modified version as amendment to the final bill.8 2 Presented during the Senate debate over the Finance Committee bill, this modified version consisted essentially of Tunney's earlier proposal plus a provision offering an optional tax credit ~ for child care expenses. A qualified taxpayer could elect to deduct child care expenses from gross income as a business adjustment or to credit 50 percent of those expenses up to $600 directly against the tax liability.
|
From page 248... ...
A larger membership, several subcommittees and, above all, the willingness of members to appeal committee decisions to the Democratic caucus served to loosen the grip of the chairman and conservative members on the purse strings. Corman took advantage of these changes and the inherent attractiveness of the revision to move for substitution of the child care deduction with a 15 percent credit of care expenses up to $300 for one child and $600 for two or more.
|
From page 249... ...
~ ~ She did, however, manage co persuade a majority of committee members to raise the credit to 20 percent of care expenses up to $2,000 for one child and $4,000 for two or more, a maximum credit of $400 and $800, respectively. She and Chairman Ullman agreed on a day when her amendment would be considered.B5 .
|
From page 250... ...
To contain the additional revenue loss of $35 million he proposed to reinstate the $18,000 income ceiling with a gradual phase-out to $27,000. The "poverty level families who incur child care expenses to work would [then]
|
From page 251... ...
ferees concurred in the Treasury's assessment. They deleted the refundability provision to avoid integrating a "social program" into the tax code and to curb revenue losses.
|
From page 252... ...
_ -credit with no income ceiling was nearly 20 times more beneficial in terms of income transfer to this income group than was raising the income ceiling to $35,000.9 2 Part of the reason for this distribution pattern is the distribution of tax liability across income classes. In 1975 the median income of all taxpayers was $8,900.
|
From page 253... ...
For every proposed change in the tax code, staff of the Joint Committee on Taxation and the Treasury Department calculate the revenue impact and distribution of benefits. These calculations cover numerous major proposals and nuances.
|
From page 254... ...
Stark argued "that a measure billed as aid for the poor or as an aid for working mothers will prove to be mostly just another unadministrable and unverifiable tax loophole." Despite this objection the measure easily passed the Congress and became law in November 1978. Effective for taxable year 1979 the revenue loss was estimated at $36 million.9 4 On the political horizon loom two possible revisions in the child care credit: refundability and an increase in the size of the credit.
|
From page 255... ...
; and William Klein, "Tax Deductions for Family Care Expenses," Boston College Industrial and Commercial Review, 14 (1973)
|
From page 256... ...
36 (Treasury Department) Subcommittee Report: Child Care Deduction (January 17, 1963)
|
From page 257... ...
6 5 Ibid., 41253-41256. 6 6 Bird: Child Care Deduction (November 30, 1970)
|
From page 258... ...
"Federal Income Tax Treatment of Child Care Expenses," Harvard Journal on Legislation, 10 (1972) , 1-40; and Klein, "Tax Deduction for Family Care Expenses," 917-941.
|
From page 259... ...
. 9 2 Calculations derived from Internal Revenue Service, Statistics of Income: 1976 (Washington, D.C.: 1978)
|
From page 260... ...
single fathers and f ether s w ith incapa c i bated w ive s adde d 1971 unchanged included $400 per Month expenses for allowed for in itemized housekeeping home care; out deduction of-home: S200 per month for one child, S300 for two, $400 for three or mor e 1975 unchanged unchanged unchanged i temi zed deduction 1976 a parent maintaining care expenses 20% credit for the household of a to allow care expenses up credit child, even if he parent to to S2,000 per is not eligible attend school year for one for the tax exemption, full-time, child, $4,000 for can credit care also for part- two or more; costs against his time work up maximum credit $400 taxes; a spouse to the amount for one child, deserted for six of income $8() 0 for two or months or more is made more; all distinc eligible Lions between in and ou t-of -home care abolished 1978 unchanged unchanged unchanged c red i t 260
|
From page 261... ...
. $145 million S35,000 marg inal phaseout S44,600 none unchanged none S107 million unchanged payments to non-de pendent relatives, who are members of taxpayer 's household, a r e deduc t ible provided their services constitute employment for social security purposes S325 million u nchang ed unc hen 9 ed all payments except those to a dependent or child under 19 of the taxpayer are eligible $36 million 261
|
From page 262... ...
Appendix A (continued) Distr ibution of Households and Tax Savings by Income Class 1954 Under $5, 000 Over S5,000 213,000 $ 12 million (67%)
|
From page 263... ...
rig a' ID u)
|
From page 264... ...
,1 o v m x .,, QJ r~ a, a' U' a' 01 o a' ~D o ~D a' ~D U~ a' a, O OO ~U~ O u ~kD ~C~ ~4e ~4e 0 u' ~a' u ~a' 0 ~0 u ~u ~co a ~cr 4e ~4) C~ tD U ~O ~r 0 ~a, ~0 ~a' u ~d' ~ u, t~ ~·n ~r- 1 1 1 _I coao 0 ~0 1 1 1 ~D ~r ~ n a ~c ~1 1 1 1 c4 ~1- d' ~a, 1 1 1 ~r ~ \ `} 4e ~1 1 1 a' ~1 ~1 1 1 1 4e~ ~U.
|
From page 265... ...
cO ~ tD tD to ~ en of 4e a' al die us en r ~ ~o 0 a O tD a' u~ r~ oi 4e a' ~D ce a, o u, 4e tD ~ 4e u' 4e c ~: Ll ~n s ~n C~ ~a, 1 ~ .^ ,15 .
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.