The enhanced Child Tax Credit has expired and I, for one, will not mourn it. Neither should you.
Sure, it’s been extremely popular — who doesn’t like getting more money from the government? But it’s not great policy. Taxpayers and recipients of the credit deserve better.
Here’s a quick review: The enhanced tax credit was a successor to the $2,000 version that was part of the 2017 tax reform. The credit was increased last year by the Joe Biden administration to $3,600 annually for each child under 6 and $3,000 for older children, with half of that paid monthly and the rest claimed on your tax return. Every family got the same amount up to an income limit. The pandemic-inspired enhancement was set to expire at the end of 2021, when the credit reverted to the prior $2,000. The president’s Build Back Better plan would extend the increase, but that proposal is in limbo as the bill remains blocked by opponents in Congress.
Since the expiration of the enhanced credit means families will lose money relative to last year, some economists and pundits are arguing that the program should be preserved, since it was a great success in achieving its goal of reducing child poverty. Don’t believe the hype.
The enhanced CTC may have had intentions, but it’s not entirely clear what they were. Based on the timing and communication from the White House it aimed to reduce child poverty and provide relief to families during the pandemic. The pandemic justification never made much sense. Between the economic impact payments, enhanced unemployment benefits, eviction moratorium and pause in student loan payments, most families weren’t financially much worse off than they were before the pandemic. So presumably the enhanced CTC was supposed to meet the larger, pre-existing goal of reducing child poverty while offering relief to cash-strapped middle-class families. And who can argue with those goals?
The case for a permanently larger middle-class entitlement isn’t as strong. Maybe the U.S. should have a big entitlement state for working middle- and upper-middle-class families. But this is not a cheap program, and it represents a big change in American welfare, which has traditionally targeted the poor, disabled and elderly.
The enhanced CTC costs more than $100 billion a year, and $1.6 trillion over the next 10 years if made permanent — more than is spent on food stamps, income support for low earners and housing assistance. Essentially, the larger credit means choosing either less money for other programs or European-sized taxes. Maybe that’s our future, but there are trade-offs in terms of the expense and a less efficient economy.
The case for trying to reduce child poverty is easier to make. Before the pandemic, about 14 percent of American children lived in poverty, compared to 12.8 percent of children in other OECD countries. That’s shameful for the world’s richest country. And as proponents of the new CTC point out, it did reduce poverty. Estimates put the reduction of child poverty at about 34 percent, and it may have reduced food insufficiency by 27 percent. This isn’t surprising; if you send lots of families checks they will have more money.
But the reduction in poverty doesn’t necessarily mean this is a good policy. First of all, the pandemic is still raging. We really don’t know how the enhanced CTC works in normal times and in a normal labor market. For example, many poor children didn’t get regular schooling, which is a source of food from the free lunch program. And perhaps child poverty could be reduced in other, better ways that cost the taxpayer less money.
By these standards the enhanced CTC falls short. By one estimate only 57 percent of households earning less than $25,000 even got the credit because it is administered by the IRS and very low earners or no earners don’t always file. The enhanced CTC aims to reduce poverty, but compared to other government programs a smaller fraction of the money goes to low-income people. This is because of the substantial benefits paid to middle and upper middle-class earners.
It’s sometimes argued that it’s necessary to offer the credit to higher earners because if you take benefits away as people earn more it discourages advancement. But the current version of the CTC also has harmful distortions. The 2017 CTC created incentives to work by increasing the size of the credit as income rose (up to $30,000 in earnings). Taking away this feature and offering a flat credit (within a higher income limit), reduces the return-to-work benefit (the money you’d get from working compared to not working).
For some people, the return to working has fallen substantially. Economists estimate that the reduction is on par with eliminating the Earned Income Tax Credit, a federal subsidy that increases the return to work because an income is required for eligibility. If we believe the EITC has been successful at getting people to work (and most economists do), it stands to reason the enhanced CTC must discourage it. The economists estimate that as the economy returns to normal, the reduction in work could undo the improvement to deep poverty that the credit provided during the pandemic.
The enhanced CTC may have good intentions of reducing child poverty, but creating a large middle-class entitlement state and undermining work incentives is not good policy — aside from the expense to taxpayers. There are better, more targeted alternatives, such as reforming welfare.
Policy needs to be judged on its execution, not just on its intent. This is a problem shared by many programs in Build Back Better. Just because a policy has good intentions, whether it’s more affordable childcare or less poverty, that doesn’t mean it’s a good policy. How well it actually solves the problem is what matters most.