Excerpt from
Child Support Guidelines and the Equalization of Living Standards
Sanford L. Braver, Ph.D.
Arizona State University
&
David Stockburger, Ph.D.
Southwest Missouri State University
To Appear In Comanor, W. (in press). The Law and Economics of Child Support.
Edward Elgar Publishing
... While equalization of living standards can thus hardly be regarded as a legitimate goal of child support guidelines, suppose it were. It is widely assumed by its advocates that applying this goal will lead to much higher child support awards. What has not been widely recognized, however, is that child support guidelines could conceivably be generous enough already that equality of outcomes has commonly been achieved. In fact, it is at least theoretically possible that guidelines have already become too generous; that the living standards advantage generally believed to be enjoyed by the noncustodial parent (NCP) may already be overcorrected. Thus, by inept income transferring through child support, we might inadvertently be making custodial households more well off than noncustodial ones. An important goal of this chapter is to provide the concepts and calculations to properly compare post-divorce living standards, which requires the analyst to take into account a large number of factors.
Most frequently overlooked are two factors: (1) differential taxation of the two households; and (2) that an appreciable portion of expenses due to children may be borne directly by the noncustodial household. With respect to taxation, Braver (1999; Braver & O’Connell, 1998, Ch. 3) showed that a large number of tax advantages are available to the custodial parent (CP), but not similarly available to the NCP. These include the claiming of the children as “exemptions”; a lower tax rate for “head of household” filing status; the Child Tax Credit; the availability of the Earned Income Credit; and the fact that child support income is tax‑free. When the CP receives the child support, she doesn’t have to pay any taxes on it, unlike most other income. In contrast, when a NCP pays child support to his ex‑spouse, he must pay federal income tax, social security or FICA tax, state, and local taxes on this amount. (Alimony has the opposite tax status.) Consequently, fathers pay all the taxes on the child support amounts while mothers get to keep the full amount. For example, assume both parents gross $2,000/month and live in Oklahoma, and there are 3 children who live with the CP who claims them on her taxes. According to calculations we will detail below, assuming they both take the standard deduction, he will pay $43 more per month in state taxes; he will also pay $179 per month in Federal taxes, while she will not only pay no Federal tax, she will actually receive $250 per month in total from the Earned Income Credit and the Child Tax Credit that he will not qualify for. Then he will pay her $400 per month in after-tax dollars for child support and she will receive these as tax-free dollars. After this transfer, she will have more than twice his spendable (i.e., after tax, after child support) income.
With regard to the second point concerning who pays the expenses for the children, virtually all comparisons (other than mine) of post-divorce SOL make what we call the “sacrosanct household” assumption. That is, they assume that all the family units’ income and only the family units’ income goes to support only that household’s members. Put another way, it assumes that a single person spends all after‑tax income to support only him or herself, and that a family pays for all its members’ needs out of only its own after‑tax income. This is an entirely reasonable assumption for unrelated households, for which the analyses were originally designed. However, when applied to a divorced family, the assumption is commonly inappropriate. It would be valid only if child support and alimony were the only monetary transfer of income and expense between the households. In actuality, however, child support and alimony paid may well represent only a portion of the expenses for the children assumed by NCPs. If they pay for the child’s food or transportation while the child is with them during visitation or access, if they buy clothes for the child, if they pay out-of-pocket for medical and dental expenses, etc., the model is ill-applied. Instead, means need to be sought to take into account these direct payments for child’s needs when comparing SOL.
We will describe in detail below an analytic method of incorporating these transfers and defrayals of children’s expenses in financial comparisons. A variant was used in Braver (1999) and Braver & O’Connell (1998), when analyzing a matched sample of households getting divorced in 1986. It was found there that when appropriate corrections for the two factors above are applied, the living standards of the two households were approximately equal. However, the comparisons are probably now outdated since the divorces analyzed all occurred before guidelines were enacted in 1988. Guidelines increased child support substantially (Thoennes et al., 1991; Bay et al, 1988; Garrison, 1994). Moreover some of the tax advantages of the custodial household have been expanded. In particular, the Child Tax Credit wasn’t part of the tax code in the prior analyses. As a result of these factors, there is a basis to hypothesize that cases in which the CP has a substantially higher SOL than the NCP may now have become the majority. ...