I want to elaborate on a point I made in my prior post about the Bennet-Brown child allowance proposal. For those who did not read the post, the Bennet-Brown child allowance plan states that:

  1. Children between the ages of 0 and 5 will get $300 per month.
  2. Children between the ages of 6 and 18 will get $250 per month.
  3. Benefits will phase out at a rate of 5 percent for earnings over $75,000 for single taxpayers and $110,000 for married taxpayers.
  4. Benefits will be paid out monthly only to those whose benefits exceed their expected federal income tax liability.

One of my suggestions for improvement on this plan was to get rid of the phaseout in point three:

The purpose of doing a phaseout is presumably to raise (or save) more money. But imposing a 5 percent surcharge tax only on high-income families with children is not a good way to do that. Instead, a child allowance plan should just raise taxes on all high-earning families regardless of how many children they have. This would raise the same money while also ensuring that high-earners with more children have more disposable household income than high-earners with less children.

On first glance, this might read as the standard point that we should use universal programs and raise taxes on the rich rather than use means-tested programs. And that is partially the point I make. But it is not just that. The other point here is that using phaseouts that are specifically pegged to the number of children people have negates the consumption-smoothing, horizontal-equity-promoting purpose of a child allowance.

The 5 percent phaseout here is no different than creating a special 5 percent surtax on high-income families with children. Specifically, the surtax it imagines works like this for married couples receiving the $300/month benefit:

  1. A surtax of 5 percent will be imposed on all income earned between $110,000 and $182,000 for child number one.
  2. A surtax of 5 percent will be imposed on all income earned between $182,000 and $254,000 for child number two.
  3. A surtax of 5 percent will be imposed on all income earned between $254,000 and $326,000 for child number three.
  4. Etc.

If you are going to use a surtax like this, then what you should do, in my view, is apply the surtax equally to all high-income families regardless of the number of children they have. So that would look something like: A surtax of 3 percent will be imposed on all income earned between $110,000 and $326,000 regardless of how many children the married couple has (and including couples with no children).

The advantages to doing it this way are as follows:

  1. Unlike the phaseout described above, this surtax design ensures that all families (high-income included) see their disposable income increase by $300/month whenever they have children. In the Bennet-Brown proposal, families who have passed through the phaseout zone do not see their disposable income increase at all when they have kids.
  2. By charging the same surtax across all high-income families, you “broaden the base” so to speak, which allows you to lower the surtax rate while still achieving the same “savings.” Here I lower it to 3 percent to indicate that feature.
  3. It is simpler and could even be baked into the marginal rate structure rather than being charged as a specific surtax (or phaseout).

Advantage number one really is the key here. The child allowance should smooth the consumption of all families, just like disability and old-age pensions. What this means is that when you have kids, your disposable income should increase relative to when you did not have kids.

Additionally, the child allowance should promote horizontal equity, meaning that similarly-situated families with different numbers of kids should be able to live roughly similar lives in terms of their standard of living.

Finally, good welfare state theory says that the child allowance is the child’s income and so should be paid evenly to all children regardless of their family situation.

The phaseout structure undermines all of these goals while the surtax structure I propose here promotes all of them.