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«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»

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281. Id. (“The inclusion of wages in the tax base is a clear example of reference tax structure, just as the exclusion of fringe benefits is due to special provisions, and therefore clearly constitute tax subsidies.”). On the other hand, Treasury did not believe that the exclusion for Uncle Sam and the Childcare Squeeze 615 February 2016] credit belonged in this category and instead believed it was primarily a cost of earning income. It wrote: “in the absence of the credit, expenses for child and dependent care would be deductible as employee business expenses.”282 Thus, for Treasury, the only portion of § 21’s percentage credit (and by extension § 129’s FSA exclusion) that constituted a tax expenditure was the “the excess of the value of the credit over the value of a deduction.”283 Of course, because §§ 21 and 129 only allow the equivalent of a deduction for a fraction of actual working childcare expenses, in almost all situations, this excess will not exist.

Given the multiple methodologies used by the JCT and Treasury to identify tax expenditures and the fact that the JCT and Treasury reached inconsistent conclusions even when using almost identical methods, it is unsurprising that scholars have also weighed in on how to best separate tax expenditure provisions from other provisions of the Code.

4. Academic Tax Expenditure Models

As discussed in Section IV.A, when Surrey first developed the idea of tax expenditures, he hoped that lawmakers would recognize that certain provisions of the Code are not tax provisions at all but operate as, and thus could be substitutes for, direct spending programs.284 As a result, some scholars have argued that tax expenditure analysis should be brought back to these roots.285 In his influential work,286 Seymour Fiekowsky argues that a provision should not be classified as a tax expenditure provision unless it is “possible to formulate an expenditure program administrable by a cognizant government agency that would achieve the same objective at equal, higher, or lower budgetary cost[ ].”287 Professor Thuronyi formulates a similar “substitutability” test for classifying tax expenditures that “involves two steps: (1) identifying a provision’s significant purposes, and (2) determining whether a nontax program can serve those purposes at least as well.”288 Professors gifts was a special rule and instead was a general rule. Id. at 6. This is one of the only ways in which the Treasury’s reference tax base differs from the JCT’s reference tax base. This has no effect on the subject of this Article.

282. Id. at 24.

283. Id.

284. See supra Section IV.A.

285. Thuronyi, supra note 190, at 1186 (“The chief purpose of tax expenditure analysis should be to facilitate the replacement of tax expenditures with non-tax-based programs and to guide budgetary choices between tax-based and non-tax-based assistance.”).

286. Cited by JCT and Treasury in formulating alternative methodologies. In practice, Treasury does not use prong two. See Edward D. Kleinbard, Chief of Staff, Joint Comm. on Taxation, Rethinking Tax Expenditures 8 (May 1, 2008), http://www.jct.gov/Rethinking_Tax_Expenditures.pdf [http://perma.cc/TP7K-AXRS] (building on Fiekowsky’s work on tax subsidies).

287. Seymour Fiekowsky, The Relation of Tax Expenditures to the Distribution of the “Fiscal Burden”, 2 Can. Tax’n 211, 215 (1980).

288. Thuronyi, supra note 190, at 1186.

616 Michigan Law Review [Vol. 114:559 Weisbach and Nussim have more recently argued that tax expenditure analysis should simply focus on whether the objectives of a particular tax expenditure could best be achieved through a direct spending program or through a tax program.289 Could the objectives, in Fiekowsky’s words, and the “significant purposes,” in Thuronyi’s, of § 21’s percentage credit and § 129’s FSA exclusion be accomplished through a direct spending program? Congressional purposes are not always easy to discern, and when discernable may be very mixed. In the case of § 21, and by extension the case of § 129, however, Congress was rather clear—working childcare expenses were seen as costs of earning income and allowing tax relief for these costs seen as necessary to calculating tax. Congress did not, by contrast, mean to serve other nontax purposes, such as encouraging procreation or mothers to work. Thus, the question of whether a nontax program could serve as an adequate substitute for §§ 21 and 129 must be answered in the negative. These sections have the tax-related purpose of compensating working parents for the costs of childcare that enable them to earn income and should not be classified as tax expenditure provisions.

Considering the preceding discussion, it is quite clear that the JCT has long mischaracterized §§ 21 and 129 as tax expenditure provisions—that is, “provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”290 As a result, provisions providing tax relief for working childcare costs should be removed from future tax expenditures lists. This would help prevent the current tax laws from being misunderstood as they have been in the past and help protect the progress that Congress would make if it were to adopt the reforms suggested in this Article.291


Just as all families look different from one another, the ways in which families earn income and care for their children vary dramatically. In twoparent families, one parent may earn all of the income while the other provides childcare; alternatively, both parents may work. And in single-parent families, one parent may alone bear the primary responsibilities of earning income and caring for her children. But unlike the first family, dual-earner

289. David A. Weisbach & Jacob Nussim, The Integration of Tax and Spending Programs, 113 Yale L.J. 955, 976 (2004).

290. Pub. L. No. 93-344, § 3(3), 88 Stat. 297, 299 (1974) (codified as amended at 2 U.S.C.

§ 622(3) (2012)).

291. Alternatively, costs such as business-related meal, entertainment, and moving expenses should be added to the JCT’s list. If the latter approach is insisted on, the text of the JCT reports should highlight the ambiguities of making this characterization to underscore to future lawmakers that the tax relief provided by these provisions should be limited with greater care than the relief provided by provisions that are clearly best characterized as tax expenditures.

Uncle Sam and the Childcare Squeeze 617 February 2016] and single-parent families are exceedingly likely to incur significant additional expenses to provide childcare while at work.

Currently, §§ 21 and 129 of the Internal Revenue Code treat the childcare costs working parents incur as personal expenses, subject to various dollar limitations, percentage limits, and phaseouts. Once these limitations are applied, working parents will receive tax relief for only a small fraction of the childcare costs they incur. This Article shows that this is inappropriate as a matter of fundamental tax policy and that working childcare expenses should be treated as nonconsumptive costs of earning income.

Having determined that the tax relief provided by §§ 21 and 129 is inadequate, this Article encourages lawmakers to be careful when choosing an avenue of reform. It might, for instance, seem sufficient to provide first aid to current laws by simply altering their overly severe limits. But while this would be a step in the right direction, it would continue to leave the tax laws vulnerable to the same legislative dysfunction that allowed the tax relief provided to working families to become so inadequate in the first place. This Article instead urges lawmakers to provide parents the opportunity to deduct working childcare costs under the same methods as other costs of earning income, which are generally not subject to stringent limitations. In doing so, this Article suggests meaningful reform of the Internal Revenue Code that will help prevent the overtaxation of the modern working family. To be sure, the tax laws cannot (and should not) solve all problems facing today’s working parents. The reforms proposed in this Article, however, could at

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