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Executive Memorandum #506 on Welfare and Welfare Spending

January 14, 1998

The Clinton Day Care Proposal: An Attack on Parents and Children

By and

President Clinton's current proposal to subsidize formal day-care use and penalize parental care of children is irrational and unfair. Under Clinton's plan, middle-class parents who hire others to care for their children will receive tax cuts to subsidize day-care costs, but parents who make a great financial sacrifice so that one parent can remain at home to care for their young children will be denied tax relief. Indeed, families who care for their own children will be taxed to pay for day care used by more affluent families. This punitive plan, which discriminates against parental care of children to promote and subsidize paid non-parental child rearing, has no place in public policy.

Middle-class families with children are severely overtaxed by the federal government. They are the victims of decades of tax-and-spend policies imposed by liberal advocates of big government. If Congress wants to help families and children, it should adopt an inclusive and non-discriminatory policy that provides badly needed tax relief to all working and middle-class families with young children. It should not discriminate in favor of one group of parents who pay for professional day care.

The Clinton Plan. The Clinton proposal targets over $20 billion of the projected budget surplus on one kind of service: the care of children outside of the family environment and away from parents. It reflects a desire to expand the welfare state rather than return surplus tax dollars to hardworking and overtaxed families with children. Although the President's day care proposal sounds family-friendly, closer inspection reveals that the proposed spending would not increase parents' options to spend time with their children, to acquire flexibility in their work schedules, or to provide the best child care arrangements possible. It would only expand both the day-care industry and the government bureaucracy that regulates it.

The Tax Bite on Families with Children. During the baby-boom era, when most of today's parents were born, the federal government had a deliberately low tax policy which was friendly to families and children. But after decades of tax-and-spend liberalism, that family-friendly policy has long since disappeared. In 1950, the typical family of four paid about 5 percent of its income in taxes to the federal government. Today, that same family would pay roughly 23 percent of its income in direct federal taxes. Adding state, local, and indirect taxes raises the tax bite to 37 percent. In the average two-earner married-couple family, the mother works not to raise her family's standard of living, but primarily to pay for the enormous tax increases imposed by decades of government spending.

Studies show that most parents would prefer to work less and spend more time with their children if they could afford to do so. By subsidizing non-parental care for children rather than providing broad family tax relief, Clinton is pushing parents in a direction they do not wish to go. By proposing a discriminatory policy which will encourage even less parental time with children, Clinton is ignoring the preferences and needs of most parents.

New Spending. In addition to providing tax relief to middle-class parents who use day care, Clinton is proposing billions in new government day-care spending through such programs as the Child Care and Child Development Block Grant and Head Start. In fact, two-thirds of the funds under the Clinton plan are allocated to new government spending, not tax reduction. Presumably, this spending will be directed at former welfare mothers and other low-income working families who do not pay taxes and therefore cannot benefit from tax relief. However, this new government spending is unnecessary. As a result of welfare reform, state governments currently have large surpluses that may be used to pay for day care for low-income working families; these funds will be more than sufficient to meet future needs.

What Congress Should Do. Congress is moving into an era of budgetary surplus for the first time in 40 years. It is critical that future revenue surpluses be devoted to tax relief, not to new government spending as the President hopes. Congress should provide tax relief to parents, not new spending directed to day-care centers. And in providing that tax relief, Congress should allow parents to decide how best to care for their children; it should aim to expand rather than narrow their options. Furthermore, Congress should treat all working families with preschool children equally. Under no circumstances should Congress discriminate against families who make a financial sacrifice so that one parent can remain at home (either full-time or part-time). Nor should paid professional day care be favored over the unpaid care given by the children's grandparents.

Congress recently took a small step toward rolling back punitive taxation of families with children by enacting a tax credit for children under the age of 18. The credit will be worth $400 per child in 1998 and $500 in each subsequent year. Congress should build on this foundation by providing additional badly needed tax relief to working families with children. It could do this in a number of ways:

• Congress should consider raising the current $500 per child credit to $1,000 for each child under the age of six (the present $500 tax credit for all children and a new $500 credit for those under six).

• Congress should consider universalizing the existing dependent care tax credit currently available only to families who pay for non-parental child care. A reasonable policy would increase the value of this credit and make it available to all taxpaying families with preschool children.

• Congress should amend the Alternative Minimum Tax (AMT), which will negate the value of the existing $400 per child credit for many families. The AMT treats children as invidious tax loopholes. Many families will be hit by it this year for the first time, just as the new $400 child tax credit goes into effect. The AMT should be modified so that it does not override the exemptions and credits for children in existing law.

• Many mothers reluctantly seek employment in large companies to obtain health insurance for their children. Congress should ease pressures on parents and broaden the availability of health insurance by eliminating tax discrimination against health insurance that is purchased by the self-employed or those working in small firms without group coverage.

• Parents with children would benefit from greater employment flexibility and work that is more compatible with family life. To provide such flexibility in the workplace without imposing harmful burdens on employers, Congress should ease current labor restrictions on work schedules and overtime pay. It should permit parents who are forced to work long hours to request compensatory time in lieu of mandatory overtime pay if they so choose.

President Clinton's plan to enlarge and enrich the U.S. day-care industry is discriminatory and fails to address the real wants and needs of parents and children. Congress should reject this plan and instead provide broad-based tax reductions to all taxpaying families with children.

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