When critiquing the designs of the various programs in the Build Back Better legislation, I have tried to avoid simply saying that the programs should be bigger and more generous and instead focus on technical design details — benefit cliffs, activity tests, work history requirements, administrative burdens, and state participation, among others — that are bad regardless of the underlying generosity of the overall program.
I have done this, not because I think inadequacy is an illegitimate critique, but mainly because it’s an obvious critique that can be levied against most proposals without limit and because it’s easy for defenders of the legislation to say that making the program bigger and more generous is simply outside the realm of possibility, which is constrained by certain politically-dictated budget constraints.
In this post, I am going to briefly dip into an inadequacy critique but only in order to make a broader point about why universal benefits make sense as a purely distributive matter. I think this will be a novel point to most people who follow these debates because the universality versus means-testing fight has mostly settled into a few familiar arguments that aren’t actually the best analysis on the subject.
So let’s dive in.
Child Care Subsidies for the Rich
Rather than provide free child care to all families, the Democratic child care plan provides sliding scale subsidies based on family income. Families with high incomes wind up receiving no child care subsidies, either because they are over a specific income threshold that makes them ineligible or because their required copayment is enough to cover the entire unsubsidized cost of child care.
On first glance, making rich parents pay large sums of money towards child care rather than providing it to them for free seems to make a lot of sense. It appears to save the government money and even reduces inequality in society. But a more sophisticated analysis reveals that this entire line of means-testing reasoning is simply confused.
To see why, let’s start by looking at the distribution of family income in the US, according to the 2019 CPS ASEC.
As you can see in the above graph, the cutoff for the top 10 percent of families is right around $200,000. This nice round number makes for some neat analysis. So, for the purposes of this post, let’s define “the rich” as families with incomes at or above $200,000.
In the 2019 CPS ASEC, there are 12.8 million rich families, so defined. Those families contain 41.1 million people, including 1.4 million kids below the age of 3. Their combined income was $4.3 trillion.
In saying that we should not provide child care subsidies to the parents of these 1.4 million kids, what we are really saying is that we think these parents should contribute money to the child care system equal to the unsubsidized cost of providing child care to those kids. If the unsubsidized cost of childcare is $25,000 per kid, then this means that we want these parents to collectively contribute around $36 billion ($25,000 * 1.438 million) towards the child care system.
Is it a good idea to make rich families contribute $36 billion towards the child care system? Absolutely. In fact, they should be made to contribute much more than that.
Is it a good idea to drop this $36 billion charge only on rich families that currently have children below the age of 3? Absolutely not.
To see why, consider the following table comparing various figures for all rich families to the same figures for rich families with children below the age of 3.
|All Rich Families||Rich Families with Kids Below Age 3|
|Kids Below 3||1,438,302||1,438,302|
|Income||$4.3 trillion||$388 billion|
|Child Care Bill||$36 billion||$36 billion|
|— Per Family||$2,797||$31,019|
|— % of Income||0.83%||9.26%|
If you use a child care user fee to dump the $36 billion child care contribution only onto rich families with kids below the age of 3, you end up charging those families an average of $31,019 (some families have multiple young kids), which is equal to 9.26 percent of this group’s income.
If instead you impose a child care tax to spread the $36 billion child care contribution across all rich families, you charge those families an average of $2,797, which is equal to 0.83 percent of rich people’s income.
Notice that in both scenarios, the rich — defined as families with incomes at or above $200,000 — are paying the exact same amount: $36 billion. What differs is not how much the rich contributes but rather how that contribution is distributed among the rich.
The means-testers claim they are saving money by not subsidizing rich parents. But they are doing no such thing! Instead, what they are doing is using user fees to concentrate all of the child care contributions onto a small subset of rich families, while the universalists are using taxes to disperse the exact same child care contributions across all rich families.
Dispersing the costs, rather than concentrating them, has a lot of advantages.
First, it’s simply less financially burdensome. A tax equal to 0.83 percent of income is massively lower than a fee equal to 9.26 percent of income, even though both raise the same amount of money. This is just the basic wisdom of broadening the base and lowering the rate, something liberal moderates seem to understand in every other context except this one.
Second, it creates horizontal equality between similar families with different numbers of young children. Imagine two married couples that both have $200,000 of income. These couples are identical except that one has two young kids and the other has none. In the world of means-tested child care user fees, the couple with the kids pays $50,000 towards child care, leaving them with $150,000 of income after child care fees versus the other family’s $200,000. In the world of universal free child care funded by the child care tax, both families end up paying $2,797 towards the child care tax and thus both wind up with $197,203 after tax.
Third, it stabilizes family finances over time. Imagine a married couple with no kids that has $200,000 of annual income. In the world of means-tested child care user fees, when they have a child, their income (after child care fees) drops to $175,000. If they have another child a year later, their income drops to $150,000 and stays there for two years before going back up to $175,000 in the subsequent year and then finally back up to $200,000 a year later. In the world of universal free child care funded by the child care tax, this family’s income (after child care tax) is $197,203 before they have kids, $197,203 when they have one kid in child care, $197,203 when they have two kids in child care, and $197,203 when both their kids are too old for child care.
Once you understand all of this, it becomes clear that the universalists are simply right about how to design these kinds of social benefits. The social democrats are not just ideologically different than the liberal means-testers. And they are not just buying votes with universal designs. More than all of that, they are just flatly correct on the technocratic merits. There is no technocratic or egalitarian case for means-testing a benefit like this. And people who say otherwise are mostly just victims of a special kind of brain fog that makes them incapable of looking through accounting conventions to see what is really going on.