The Child Care tax credit may have unfavorable incidence

Child care tax credits are intended to relieve the financial burden of child care for working families, yet the benefit incidence may fall on child care providers if they increase prices in response to credit generosity. Using policy-induced variation in the Child and Dependent Care Credit, this paper presents evidence of substantial pass-through: over half of every dollar is passed through to providers in the form of higher prices and wages. Increased non-refundable credit generosity may have the unintended effect of making child care less affordable for low-income families, a result with distributional and spatial implications due to income sorting of families within an urban area.

That is from a new paper by Luke P. Rogers, via the excellent Kevin Lewis.

Comments

The pro-natalist government of Australia gives $215 AUD per child per week for childcare. That's $150 US. Families that earn less than $45,115 AUD ($32,030 US) per year get the full amount. Families that earn above that have the amount reduced and single child families that earn over $156,914 AUD ($111,410 US) get nothing. This way poor and median income families get the same amount. Higher income families get less.

Childcare has to meet government standards for the payment to be received. This pushes up the cost of childcare. It also means that childcare meets high standards.

I know nowt about Aussie childcare but when we lived there the Kindy we used was very good. On t'other hand, the standard in our primary school was feeble.

When I went to primary school in Australia we were all taught the basics. These were:

1. Sit down.
2. Shut-up.

I was so good at these two vital things I am vaguely surprised I never become Prime Minister.

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I'd be uninterested in subsidizing someone else's spawn even if I didn't despise children.

does that includes grandchildren?

Not too surprising. Insulation from prices in third-payer programs typically leads to an increase in prices and more money going to the administration of the goods and services. The American healthcare system is the most clear-cut case, but this study just seems to stack onto the evidence for this tendency.

One immediately thinks of tuition tax credits / subsidies, which appear to be largely captured by increased tuition prices.

The world is more complex.

The problem with the claim is that states cut the subsidies to state supported institutions, which then caused state institutions to raise tuition. Federal support to state higher ed was premised on the theory that students would be able to get loans, so rather than giving money to the institutions, so the story went, they should give it to the students in the form of a loan program.

Here is a history of federal and state funding and the origin of loan programs and tax credits: https://www.washingtonpost.com/news/made-by-history/wp/2017/12/21/how-tax-policy-broke-the-american-university-system/?utm_term=.898669ddc4b9

In other words, the capture was by state taxpayers who paid less subsidies to higher ed.

That's the tuition side. If you look at the apartment side, students live better today because they use the loans for better housing as well.

Maybe both can be true. My graduate school built a new facility that opened when I started in 1995. By 2015, the administrative staff had tripled and the school was out raising money for a larger building. And, yes, tuition tripled as well.

Taxpayers would capture the subsidy only if states did not spend the funds subsidizing something else - which I am sure they have.

'more money going to the administration of the goods and services'

Well, that is where the real money is found, right? Much like the apparently no longer discussed American attachment to a strong dollar policy, regardless of what that means in terms of maintaining, much less creating, an export capable manufacturing base.

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You do realize this is probably one of the most macabre fake posts ever made here. From the Post - 'Turkey concludes Saudi journalist Jamal Khashoggi killed by ‘murder’ team, sources say

Two people with knowledge of the probe said Turkey believes Jamal Khashoggi was killed in the Saudi consulate in Istanbul earlier this week. Saudi officials have denied any link to the disappearance of Khashoggi, who has written columns for The Washington Post’s Global Opinions and has been sharply critical of his country’s government.'

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I doubt it.

Who derives the most benefit from student loans? I suppose it's correct to call them "student loans" since the students are the borrowers, but wouldn't it be more accurate to call them "professor loans" for the same reason we call it a "child care tax credit" rather than a "parent tax credit". Is labeling important? It is as a marketing tool. Here's an essay in which the author argues that behavioral economics is a marketing (i.e., labeling) phenomenon: https://www.nytimes.com/2018/10/06/opinion/sunday/behavioral-economics.html

Yet people who get upset at student loans often seem to be eager to replace public schools with vouchers. Who really benefits from vouchers?

Before student loans scholarships were a larger portion of financial aid. But student loans have the market based feature that the student has to pay them back. Do car loans cost you to overpay for a new car?

Boonton, Yes, car loans do increase the price of cars if they increase demand. A loan enables a person who would not be able to pay with cash to purchase. It's the intersection of supply and demand curves and a shift in the demand curve.

'car loans do increase the price of cars if they increase demand''

Not really. Though obviously car loans increase the cost to consumers, and if production can not rise than increased demand will lead to higher prices.

However, in the real world of mass production, the cost per unit goes down with increased production, meaning that increasing demand which leads to an increased number of units sold means that each individual customer pays less.

(Yes, lot of details, but essentially, this is why mass production is not so easily represented by the intersection of supply and demand curves when talking about the price mechanisms which mass production uses.)

Not quite. In theory at least car loans do not increase the value you place on a car. If you think a car is worth $20K, you're not going to borrow $30K to buy one. Car loans can increase demand for cars because they allow the person with just $10K cash to buy a $20K car but a price increase caused by a demand increase is not necessarily inflation.

Now I do suspect financing does act as a sort of marketing gimmick. A guy comes in with $10K cash wanting to buy a $10K used car but the saleman tell him for just a $100/mth payment he could have a nice new car instead. Maybe he would have only paid $20K for a car if he was using all cash but between the confusion about 'low monthly payments', hidden fees and whatnot he ends up agreeing to pay $25K.

Why isn’t childcare a constant returns industry?

That's my question, too. Helicopter parents indulging in "enrichment" activities in their daycare purchases?

Bah. The child care tax credit is like a de minimus consolation prize compared to the cost.

“I raised two kids and all i got was this lousy tax credit...”

If you want to talk market-distorting tax policy, we should stick with homes, business debt, and capital gains

Well, the recent tax law reduced the distortion of business debt (limiting deductibility) as well as dramatically limiting the distortion with homes (partly on the high end with the limitation of mortgage balance covered, partly by providing a bigger standard deduction and partly by limiting the SALT deduction, also a big distortion.)

So while you can cheer on those aspects of the recent tax law while being annoyed about the Section 199A deduction, it's worth having research about tax credits popular on both sides of the aisle and with many economists, instead of just focusing on things that economists already mostly agree upon and which in some cases have been recently limited.

I will admit I have not yet processed the ramifications of recent changes on home mortgages, but capital gains and other major distortions remain

You mean like preferential access to credit for house buyers mostly increases the price of the houses?
http://perkurowski.blogspot.com/2018/01/many-of-our-young-will-be-without-jobs.html

This is unsurprising, given how much good daycare costs, and how little the actual workers get paid: We are in a situations where dedicated nannies might be more affordable.

What I wonder about is why the split happened this way? Too much regulation making it hard to open new daycare centers? Too strong a value of reputation, and too difficult to expand, making prices go up? Making it difficult or unsafe to hire nannies, that would get paid better per hour than daycare workers with the same responsibilities?

Economists should spend less time talking tax rates, and more talking about how to fix high inflation services.

This is almost entirely a regulatory and liability issue.

If Mrs Smith could watch 5 of the neighborhood kids for $100 - $200 a week each in addition to her own, the market would clear.

Plenty of stay at home moms would take 25,000 - 50,000 in extra income a year, and plenty of moms who would rather stay at home could swing it on 25,000 - 50,000 a year to make up for lost income.

We have decided as a society that it would be an insane risk to allow this to occur. So we banned it.

"over half of every dollar is passed through to providers in the form of higher prices and wages. "

So, businesses are harmed by low income customers getting higher incomes and thus spending more?

No, what that sentence is saying is that the child care facilities themselves raise wages and prices (including profits), not wages of recipients of the tax credit.

That is, as a restricted tax credit that can only be spent on certain (often regulated) products, the producers get more of the benefit. The regular child tax credit presumably has much less of an issue, since parents can spend it on child care but can also use it for other things (including informal child care arrangements outside the regulated market.)

A tax credit is an offset to tax obligations. So, if you have low income and low taxes, what good is it? It might be good for a person with higher income, just the folks we want to help.

In fact, the research suggests that it's bad for people too poor to get the credit, since it raises the price of child care. That's often the problem with subsidies for the middle class.

And yet this is just the latest thing to be subsidized...When one considers how many special interests are already subsidized to some extent, not to mention the fact that approximately half of healthcare is already covered by government, how much internal inflation would one really expect from this corner of the economy?

Doesn't econ 101 imply that in the long-run supply of child care should be equal to marginal cost and therefore perfectly inelastic? As the article states, people are making more money from the activity, so can't we assume new suppliers will enter the market pretty quickly? On a cursory check, I didn't see anything in the paper dealing with the benefit incidence over the long-run, but this seems too obvious a response for it not to be accounted for somewhere.

How much do we really care about this issue if it is temporary?

How much of this is pure price inflation, and how much is due to a change in quality? I'd expect low-income families to buy better child care if they could afford it.

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