THE POTENTIAL OF CHILD-CARE TAX CREDITS TO REDUCE POVERTY AND WELFARE RECIPIENCY

As more and more mothers of young children enter the work force, interest in government financing of child care grows. The chief government subsidy for child care is the child care credit in the federal Internal Revenue Code. This is a nonrefundable credit and therefore provides benefits only to those with incomes high enough to require them to pay income tax. Yet of the $ 5.5 billion spent by the federal government on child care in 1986, this program accounted for $ 3.5 billion. This paper simulates the effects of expanding the child care tax credit by (1) doubling the reimbursement rates of the current credit; (2) making the credit refundable; and (3) both making the credit refundable and increasing its value for all families with income below $ 32,000. Results suggest that these changes will have modest effects on the income and earnings of mothers, and on the poverty gap and welfare recipiency. Costs, however, differ substantially. Doubling the value of the credit is far more expensive than either making the credit refundable or making it both refundable and more generous at the bottom of the income distribution. Making the credit refundable may cost taxpayers very little by leading to increases in hours worked and concomitant reductions in welfare payments. © 1990 Kluwer Academic Publishers.