Have children? You deserve a bigger tax break

So what should policy makers do? Reihan Salam at Slate proposes a much larger child tax credit that would more than offset a broader increase in tax rates. There already is a tax credit for children, but it is small and wouldn’t be that helpful to our hypothetical family.

The advantage of a tax credit is that it could be claimed by the poor. Children who grow up in poverty tend to suffer from malnutrition and elevated stress hormones that permanently impair brain development, so money that makes it easier for low- income parents to provide a decent life for their children would make a lot of sense. The danger, however, is that some people would have more children than they could support just to claim the government benefits. Their children would be the real victims and may end up permanently dependent on support from the state for the rest of their lives. That wouldn’t exactly solve the problem of freeloaders.

Another option: Adjust the rates paid for payroll taxes, which go toward entitlements, according to the number of children you have. Those with more children would pay lower rates. Those with none would pay more to cover the difference between the benefits they will receive in the future and the taxes their non-existent children will fail to pay into the system. Older parents could get credits depending on how much their adult children pay in taxes.

Whatever policy makers do, they should think of the children.

1. Both partners in each couple work and each couple takes home about $70,000 after taxes. Each couple’s after-tax income grows by 4 percent a year on average until they retire at 65. Both households set aside 20 percent of their disposable income in an investment portfolio that generates an average return of 5 percent, which is reinvested each year. Then they collect Social Security benefits and draw down their savings enough to maintain their standard of living (after-tax income net of savings in their final year of work, including 3 percent growth in Social Security benefits and 4 percent growth in desired wages) until they run out of money.

Let’s assume that child-care costs start out costing about $20,000 a year and that the cost of that care rises by 3 percent until they reach 18. Then the parents pay $70,000 a year for their two kids to go to college for four years. After 22 years, the parents finally get to take home as much as their childless peers until they retire.