Let the Child Tax Credit work
The focus of a children’s tax credit should be…children.
By: Ian Berlin and William G. Gale
Date: July 7th, 2022.
Congress has a chance to reduce child poverty by about one-third by making permanent the Child Tax Credit (CTC) that was in effect during 2021. Evidence suggests that the benefits of doing so would far outweigh the costs.
Last year, the American Rescue Plan expanded the CTC, paid it monthly, and made it fully refundable, meaning that the entire amount could be received even by low-income families with little or no earnings. These changes reduced the monthly child poverty rate by about one-third beginning with the first payment in July 2021, keeping 3.7 million children off of the poverty rolls by the end of the year. Food insecurity for recipients also fell by 6.1 percentage points, far outpacing the decline in food insecurity amongst non-recipients. But the expansion and full refundability expired at the end of 2021.
Congress is now considering making the 2021 changes permanent. Recently, during a hearing of the House Select Committee on Economic Disparity and Fairness in Growth, several Republican committee members criticized the expanded CTC, claiming that it disincentivized work.
This criticism is part of a paradoxical refrain about women’s choices. When women with children stay at home, some conservatives criticize them for not working. But when mothers work, other conservatives criticize them for not being with their kids. The correct response to those criticisms is that the CTC gives parents the resources that enable them to make the best choices for their families.
In addition, the focus on women’s labor supply is misleading, for two reasons.
First and foremost, the focus of a children’s tax credit should be…children. Children born into poverty face social and economic situations that are not of their doing.
Alleviating childhood poverty has lifelong consequences. One study found that even a one-time average benefit of $1,300 for low-income families with infants raised the earnings of those children in young adulthood. These benefits more than paid for themselves by increasing subsequent income tax revenue.
A host of other studies find that increasing government assistance for young children boosts high school graduation rates, college enrollment, wages, and tax payments while decreasing the likelihood of being incarcerated or needing government assistance as adults. The effects of being poor are so severe that children raised in poverty have significantly less gray matter brain development than more fortunate kids, leading to permanent differences in educational outcomes.
The other reason why disincentives to work are the wrong focus for CTC discussions is that the effects are uncertain and likely to be small. There is little evidence that the expanded CTC caused women’s labor supply to decline. One recent NBER working paper found no empirical evidence that parents receiving the CTC worked less in 2021, regardless of their income level. This study corroborates a report by our Tax Policy Center colleague Elaine Maag and other researchers at the Urban Institute who found that there wasn’t any significant difference in employment between households who received the payments and those who did not.
Instead, some data indicate that people stopped working only after they no longer received the monthly payments. After the expanded CTC expired, employment declined for recipients compared to non-recipients, suggesting that some families were using their checks to pay for childcare, thereby increasing labor force participation rates among parents.
Many permanent cash assistance programs do not appear to negatively impact labor force participation either. The Alaska Permanent Fund provides a yearly dividend to all Alaskan residents. Yet research shows that, nearly 40 years after that program was first implemented, there has been no change in the employment rate. Any decline in incentives to work has been offset by increased demand for workers to produce goods and services that residents purchase with their extra income.
Another study looked at a broad range of cash assistance programs and found effectively no reduction in the employment rate from program participation. Even in the most generous case, a negative income tax experiment where individuals received far more than any proposed CTC payment, employment declined only slightly.
When the costs of raising children in poverty are so great and the lifelong benefits of even small cash allowances so significant, expanding the CTC is a bargain.
Programs in other countries tell a similar story. For example, when Canada expanded and restructured its child allowance in 2015 and 2016, the poverty rate for mothers declined while employment stayed constant.
In short, the evidence for declining labor force participation with an expanded CTC is weak and such arguments miss the larger point. When the costs of raising children in poverty are so great and the lifelong benefits of even small cash allowances so significant, expanding the CTC is a bargain.