Dependent Care Tax Benefits: Ethical Issues in Taxation

This paper, expanding on prior work, illustrates how some taxpayers are better off claiming the dependent care credit than the exclusion and some are better off claiming the exclusion. However, taxpayers likely do not know in advance which is better for them. The paper also shows how some taxpayers may actually be worse off participating in an employer sponsored plan and claiming the exclusion versus simply paying the costs directly without attempting to claim any tax benefit. Since low-income taxpayers, the ones most likely affected by these anomalies, may be unaware of the potential problems, even after a choice is made, the paper also discusses the ethical and public policy issues involved in creating this type of potential problem through the legislative process.