Child savings accounts should replace tax credits and deductions

Current federal policy has a Child Tax Credit. This means if you pay taxes, you pay less taxes by $1000 per child (this does phase out at high incomes). If you have a low income and have no taxes due, or less than the credit, you get $0<Credit<$1000. Some of this is a refundable additional tax credit, depending on your income. However, there is no reason to expect someone with a zero income has lower costs per child than someone with a higher income.

In addition to the Child Tax Credit, there is a Child and Dependent Care Credit. This can be worth up to $900 depending on income.

The amount you can deduct from your income per dependent is $3,950. At a tax rate of 20% this is $790.

I therefore suggest we replace all of these with a child savings account of the same value. Each fortnight, a deposit would be made to an account at a federally insured bank or credit union set up on behalf of the child, and managed by his or her guardian. This deposit, on the order $100 every two weeks per child (about $2600/year), is certainly less than the cost of housing, feeding, clothing, and otherwise maintaining a child, but can certainly contribute. If left untouched, at 18 a child could have accumulated, excluding interest, $46,800. That is a nice nest egg to start with.

  • Compared with anything dealing with taxes, which is visible only once per year, this continuous deposit has more salience, since account holders will see the money accrue.
  • It would be continuous rather than a lump sum every April, so would have more positive effects on the economy.
  • It would be a natural mechanism by which an economic stimulus program could be achieved, since amounts could be temporarily increased in the short-term as needed.
  • It would be additive if the account holder didn’t withdraw the money, so by the principle of the default  being savings, would increase personal savings.
  • It increases the relationship between people, especially low income, and the formal banking system, rather than the check-cashing and pawn system that now serves as financing in too many cases.
  • It provides an account to which others could add to help save for the child.
  • It simplifies the tax code.

Withdrawals by guardians would of course need to be for the benefit of the child, but given that (a) money is fungible, and (b) the cost of raising a child exceeds the amount contributed by the government, that should not be hard to establish and in practice would be un-enforced except in the case of other child abuse or financial crimes.

While it might be difficult, and scoring this would be a government expenditure rather than a tax expenditure might have budgetary gimmicks associated with it, this seems like it would be advantageous all around.


  1. The UK had a program called the Child Trust Fund, which deposited up to £500 at birth (for low income families) and again at age 7, but this was eliminated in 2010.