Policy Idea: The Children's Trust Fund

Challenge accepted, senator.

I testified in front of the Senate last week. Elizabeth Warren asked me to speak to the Economic Policy Subcommittee, which she chairs, about the childcare cliff.

Your girl in action:

During the hearing, Senator Kennedy from Louisiana said that affordable childcare was a policy that is as likeable as a golden retriever, but that doesn’t make it something we can do. He even asked me, how we gonna pay for it, doc?

Challenge accepted.

Create a Children’s Trust Fund from revenue collected from the estate tax. The Fund would collect in the Treasury and would be dedicated to early childhood investments, with the goal of complete coverage of children in care and preschool capped at a minimum cost for parents.

My argument, in three parts.

1. The Estate Tax

2. Paying Up and Paying Down

3. Super Rich Kids

The Estate Tax

The estate tax is an income tax. You earn money at your job, that’s wage income. You make money in the stock market, that’s capital gains income. In this case, you inherit money from someone who is not your spouse, and it’s estate income.

The vast, vast majority of people who inherit money do not pay the estate tax on that income, however, because estates below a certain size are “exempt” from the tax. So you get $1000, or $10,000, or $100,000—none of that is taxed. It’s only when you get into really high numbers that the tax applies.

The exemption has a history of bouncing around. In 1916 it was $50k, ten years later it jumped to $100k, then after a few years back to $50k, then $40k, and then settled into $60k for about 30 years. In the late 1970s, the exemption was increased until it hit $600k, which it was until the late 1990s, and eventually it reached $675k in 2001.

Here’s that in a figure:

Then, starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (aka in the policy world EGTRRA, pronounced egg-tra, and aka in the political world, the Bush Tax Cuts), the exemption increased another ten fold, reaching nearly $6 million in 2017. That’s when the Tax Cut and Jobs Act (aka TCJA aka The Trump Tax Cuts) doubled it again. Right now, the exemption is $13million, and rising.

But because this is such an expensive move, and because bills are supposed to be budget neutral over ten years, in 2025, the exemption goes back to $5.5 million and increases with inflation for the years following. It’ll look something like this:

(It’s kind of crazy how flat the period of 1916-2001 looks like in this chart compared with the last one. It’s all perspective, even in taxes.)

The Congressional Budget Office estimates that even at the $5.5 million level, the estate tax will start to pull in $40-$50 billion a year.

Because it’s exemption has increased so much, fewer and fewer people pay the tax. Some estimate it’s just a thousand households. The IRS publishes the assets taxed by type. It’s a lot a lot a lot of stock.

Even in the bygone years of an estate tax in the single millions, the most commonly held asset inherited was stock. You can read more facts about the tax here.

As a share of total revenue of the federal government, though, estate tax collections are quite small, just 1%. Which means that it doesn’t necessarily break the bank of the federal budget to apportion estate tax revenue to the side. In fact, a lot of policy proposals have eyed the estate tax over the years. Some have suggested adding to Social Security. It’s a revenue stream that’s large enough to fund something but not so large to hurt the rest of the budget.

I think it should be deposited into a Children’s Trust Fund. At the current projected levels, it would be enough to finance the childcare and universal preschool components of Build Back Better. That was projected to cost $40 billion, and the estate tax is projected to bring in $40 billion. There’s a nice symmetry to it.

If a little higher, it could start to fund an expanded and fully refundable Child Tax Credit. The version we had in 2021 is about three times as expensive, closer to $150 billion a year, but we could always start with a smaller version and increase as the Fund grows in size.

But why should this money go to children? Two reasons.

Paying Up and Paying Down

I love Social Security. It is an incredibly well designed public program that is wildly successful at its job. It’s also incredibly popular. Yet it rests on the notion of an entire generation financing another other through the tax system. We all pay up, through a chunk of wages, for the workers who came before us.

I’ve been hocking child care investments in every platform and every channel possible and I know with 100% certainty that someone will respond “I shouldn’t have to take care of someone else’s kids.” But we all do that for Social Security. We all take care of someone else’s parents or grandparents.

(On some level the usual rejoinder of ‘don’t have kids if you can’t afford them’ doesn’t apply here—who could afford grandparents??)

I think part of the appeal is the intergenerational compact, that it only works if we all agree to do it, and we do. A Children’s Trust Fund would be the same type of compact. A declaration to older Americans: we all pay up for all of you, so if you do spectacularly well, you pack back down to our kids.

There’s a symmetry here too, paying up and paying down. Working to take care of the elderly. The elderly taking care of kids.

Super Rich Kids

People who don’t like this idea would say we can’t tax the rich to pay for everything, so it’s good to clarify from the start that rich people don’t pay the estate tax. The dynasty class pays the estate tax. It’s not fly-first-class rich so much as a only-take-private-jet-never-flown-commercial rich.

And paying the estate tax isn’t exactly going to bust them. On average the tax rate levied on their inheritance is 16%.

The sad truth is that the United States is not a meritocracy. It has limited upward intergenerational mobility, and for the most part, a person’s economic status is predicted by their parents’ income. Some even argue that we are in an era of downward mobility, where many people will not earns as much as their parents.

Taxing a windfall inheritance at the margin won’t change any of that. The dynasty class will always have every advantage.

However, taking that margin and investing it in universal high quality education would change that, for two reasons.

Reason 1 - The starting point of terrible inequality

How children spend age 0-5 right now is highly, highly unequal. It’s logical if depressing. Childcare is expensive, the better the care, the more expensive it is. Hence, higher-income children get high quality care and low- and middle-income children get low quality care.

This paper from a set of economists set out to show how unequal 0-5 is spent, and I think the figure below says it all for me. They look at the quality of care based on 1) the education of the mother and 2) the type of care, in a center or with a relative and 3) look at age 0-2 and 3-4. What they show is for both age groups, highly educated moms have their kids in high quality care, it doesn’t matter what type it is. And the inverse is true for less educated moms.

The silver lining of such a low floor for so many kids right now is that there’s a huge margin for investment gains.

Reason 2 - The big, big gains

High quality early childhood education has enormous dividends. Enormous. There’s a few programs that we look to determine this:

• Small interventions in the US, like the Perry Preschool Project and the Abedecarian Project. Effects were large, especially on things like intergenerational mobility.

• Larger interventions in the US, like Head Start, which provides high quality care to select children who are low income. Again, large and good effects. Or some expansions of preschool in certain states.

• Universal-like expansions outside the US for early childhood education. They found increases in intergenerational mobility.

Together, these studies and others suggest that if the US had a universal high quality 0-5 policy through a combination of childcare and preschool, it would benefit children of lower and middle income families the most in their education and lifetime earnings. Making sure all kids have the type of advantages only richer parents can now afford.

For all the really good reasons to fund early childhood, and all the beneficial things a permanently funded Children’s Trust Fund would accomplish, I just kind of like the idea of giving the super rich kids some competition.