The section 21 child and dependent care tax credit has received little attention in recent tax policy debates. When the credit is discussed, its supporters and opponents often treat it as simply another middle-income tax break. The credit is sometimes even confused with the section 24 child tax credit.
The child care tax credit, however, is not just another middle-income tax break. By providing tax relief for work-related costs, it helps offset the work penalty imposed by the income tax and promotes economic efficiency. Common objections to the credit are based on a failure to understand the appropriate tax treatment of work-related costs, such as child care.
In Part A of this article, I describe the current provisions of the child care tax credit. In Part B, I discuss the appropriate tax treatment of work-related costs, as applied to child care. In Part C, I respond to misconceptions about the credit. I explore ways to strengthen the credit in Part D and conclude in Part E. . . .
Alan D. Viard is a resident scholar at AEI.