Is the Child Tax Credit a Bad Idea?

December 21, 2019 Topic: Politics Region: Americas Blog Brand: The Buzz Tags: BabyTax ReformEducationCongress

Is the Child Tax Credit a Bad Idea?

Popular as the CTC may be, calls for increasing it for low-income families are based on two problematic narratives.

Congressional efforts to expand the Child Tax Credit (CTC) in this year’s spending bill were unsuccessful, but Congress seems intent on increasing it, as it has done so regularly since the CTC was first legislated more than 20 years ago. Popular as the CTC may be, calls for increasing it for low-income families are based on two problematic narratives. One is the idea that the current CTC fails the lowest-income Americans — an argument that ignores the broader social safety net. The other is the idea that the CTC, which is not linked to work, can reduce poverty without affecting employment.

Created in 1997, the CTC has historically received a great deal of bipartisan support. It began as a small tax break of $500 per child for tax-paying families, but it has since been increased over the years to $2,000 per child, including up to $1,400 per child in refundable tax credits for families who owe no federal income taxes. The most recent proposal from Sens. Mitt Romney (R-UT) and Michael Bennet (D-CO) would have increased the CTC to $2,500 for children age 6 and under and made the first $1,500 fully refundable (the first $1,000 for children older than 6). In practical terms, this means low-income families would get a cash payment of at least $1,500 and up to $2,500 for each of their children under the age of six, which is roughly one-third more than what they currently receive from the partially refundable CTC.

Some argue that the CTC needs to be fully refundable to better balance its benefits toward low-income families. But this argument wrongly assumes that the CTC represents the entirety of benefits for those with limited income, when in fact it represents only a small share. When considered alongside the Earned Income Tax Credit (EITC), families with annual incomes below $50,000 already get the bulk of child-related tax credits. In total, families with income less than $50,000 received $66 billion from the EITC and $38 billion from the CTC under 2018 tax rules.

Source: Joint Committee on Taxation, Estimates of Federal Tax Expenditures For Fiscal Years 2018-2022.

Further, tax credits represent only a small portion of the $877.5 billion spent annually through 92 federal programs targeting low-income Americans, approximately $300 billion of which goes directly to children. On an individual basis, a single mother with one child and $15,000 in annual income would currently receive $3,500 in the EITC and $2,500 in SNAP benefits. Counting government-funded health insurance and child care assistance would nearly double her annual income. The perception that low-income families are being left behind by the federal government is misguided.  

Justifications for further expanding the CTC also tend to downplay the potential negative effects on employment. Like any government payment, the CTC affects the decisions people make about when and how much they work. Decades of research shows that unconditional government payments can reduce an individual’s work effort. Consider the following examples:

Negative income tax experiments in the 1970s: “Despite the wide range of treatments and evaluation methodologies, the labor supply responses from the four NIT experiments are remarkably consistent. On average, husbands reduced labor supply by about the equivalent of two weeks of full-time employment. Wives and single female-heads reduced labor supply by about the equivalent of three weeks of full-time employment.”

Introduction of the Food Stamp Program: “Consistent with theory, we find reductions in employment and hours worked when food stamps are introduced. The reductions are concentrated among families headed by single woman.”

Canada’s Universal Child Care Benefit: “Our results present an interesting puzzle: while legally married mothers are likely to reduce their labor supply on extensive and intensive margins when receiving the UCCB, divorced and separated mothers are likely to increase their participation in the labor force when receiving the UCCB and any positive response on the hours margin is not statistically significant. The labor supply of mothers in common-law relationships and never-married mothers does not appear affected by UCCB receipt.”

None of this research reveals precisely what would happen with a fully refundable CTC in the US, but it shows that unconditional government payments can, and often do, affect employment negatively. Scholars can debate the particulars, including what subgroups of people respond more and whether the effects are meaningfully large, but it would be naïve to believe that unconditional cash assistance from the government has no effect on employment decisions at all.

In the US context, this is especially true for low-income families who already face a number of work disincentives in other federal programs. Expanding the CTC would worsen an already perverse system, in which people who decide to work more risk being financially worse off because they could lose all government support.

A pro-work approach is better policy for lifting families out of poverty. This involves addressing the employment disincentives built into existing federal programs and offering supports such as child care assistance and the EITC to working families. For nonworking people, government support should be available as part of a broader agenda to help people get back on their feet. But families, communities, and the private and philanthropic sectors play an equally, if not more crucial role than government. Making the CTC fully refundable might seem like a useful way to help low-income families, but it is inconsistent with the type of pro-work social safety net that low-income families deserve.

This article by Angela Rachidi first appeared at the American Enterprise Institute.

Image: Reuters.