Tax Credits and Shared Parenthood: Improving Child Tax Benefits for Children when Parents Live Apart

• In Event: How are families navigating fragmented social support systems?

Abstract

Tax and transfer policies typically presume that children live stably in a single household, with either one or both parents. When parents live apart, typically only the parent with whom the child spends the majority of time may claim the child. We estimate the potential impact of alternative policy options for participation and credit levels for the EITC and CTC, in an accounting framework. We use data from the 2012-2020 CPS-CSS, representative of parents who have a child whose other parent lives outside of the house. Because the CPS-CSS does not include information on the earnings of nonresident parents, critical for estimating the implications of alternative policy options, we use UI wage data from matched pairs of divorcing and never-married parents in Wisconsin in the same time period to simulate earnings for the non-reporting parent in the CPS-CSS. We estimate changes in the distribution of credits received were the EITC and CTC to be based on either parent’s (rather than necessarily the resident parent’s) earnings, and consider different distributional rules (e.g., with the marginal gain accruing to the resident parent, or split, or distribution contingent on the nonresident parent’s involvement). We also estimate differences for divorced and nonmarital couples and for families with pre-EITC and pre-CTC incomes below poverty. Overall, the proportion of resident parent families estimated to qualify for the EITC grows from 53.9% to 73.8% when parents are permitted to claim either parent’s earnings as the basis for the EITC, with an additional 7.5% qualifying for a higher EITC. Overall, the estimated mean increase in EITC among those with an increase is about $2750. Resident parents with incomes below the poverty line are estimated to be particularly likely to benefit: 28.9% newly qualify for the EITC, receiving an average of $3330. Across all families, the estimated CTC participation rises by a relatively modest 14.7 percentage points, but among families with incomes below the poverty line, estimated CTC participation rises by 32.9 percentage points, substantially reducing the gap in participation and increasing the anti-poverty impact of the CTC for single parent families. The reality of, and growing policy preference for, shared parenting contrasts with tax and transfer rules that deny that reality. This paper estimates the implications of a range of options to address this challenge and offers insight into the policy challenges and equity implications. The optimum design of shared parenting options must consider how best to allocate scarce resources while minimizing administrative burdens and unintended inequities across different living situations. Given substantial differences in living situations across income, racial and ethnic groups, these reforms have the potential to contribute to more equitable outcomes for children and families.

Author

• Maria Cancian, Georgetown University McCourt School
  Presenting Author