The Case Against the Child Tax Credit

  • July 31, 2023
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Adam N. Michel and Vanessa Brown Calder

First introduced by Republicans as part of the Contract with America, the child tax credit (CTC) has won wide bipartisan support as an income‐​transfer program to fight poverty, a subsidy to middle‐​class families, and a tool to boost declining fertility, yet it is poorly suited to meet each of these goals.

Republicans doubled the CTC in their 2017 tax reform, and Democrats temporarily expanded it again in their 2021 COVID package, increasing the dollar value and removing the de facto work requirements. Republicans and Democrats agree that the CTC should be larger, the only disagreement is on how much the credit should be enhanced. There are bipartisan efforts in the House and the Senate to expand the CTC, while some states have moved forward with their own child tax credit programs.

The CTC is a costly transfer program for taxpayers with kids who do not need government handouts and who do not meaningfully change their fertility decisions in response to larger payments. As an anti‐​poverty program, the CTC is poorly targeted, and without income requirements, regular no‐​strings‐​attached payments from Washington are counterproductive for the most vulnerable families.

There are better ways to support families by reducing the regulations and other barriers that increase the costs of core child‐​related goods and services. Without substantial deregulation, increasing direct government payments to families will simply lead to higher prices rather than expanded supply.

By making payments through the tax code, the CTC allows Republicans to support spending they would otherwise oppose since tax credits operate outside the annual Congressional appropriations process. Democrats support the CTC because they recognize it for what it is, a subsidy program administered through the tax code. Congress should repeal the CTC and use the savings to lower tax rates for Americans broadly. It certainly should not be expanded.

History of the CTC

The child tax credit was first introduced in 1997 as part of the Taxpayer Relief Act. It quickly increased from $400 to $1,000 while lowering the earned income requirement from $10,000 to $3,000. The credit was further expanded in 2017 as part of the Tax Cuts and Jobs Act, which increased the credit to $2,000 per child, lowered the earned income threshold, and raised the beginning of the income phaseout from $110,000 to $400,000 for married taxpayers ($75,000 to $200,000, single). The 2017 reform also eliminated the child and dependent exemption, which was more than offset by the $1,000 increase in the CTC for a taxpayer at or below the 25 percent income tax bracket (about $150,000). Along with a majority of the other changes enacted in 2017, the CTC and additional exemptions return to their previous values in 2026.

In 2021, the American Rescue Plan Act temporarily increased the CTC for just one year to $3,600 for children under 6 years old and $3,000 for children under 18 years old. The full credit was also made temporarily fully refundable by removing the earned income requirements, and half of the credit was delivered as advance payments directly into taxpayers’ bank accounts each month. Figure 1 shows the maximum CTC amount from its introduction through 2026 for 0–5‑year-olds, including the scheduled reduction under current law.

Is the Child Tax Credit an effective subsidy?

The CTC provides a large subsidy to families with children. Unlike the earned income tax credit (EITC), cash aid (TANF), food aid (WIC, SNAP), and public health care (Medicaid and the Children’s Health Insurance Program), the CTC is primarily a subsidy for middle‐ and upper‐​income Americans. As currently designed, the CTC is not primarily an anti‐​poverty program. Only 19 percent of child tax credit expenditures are claimed by the lowest quintile of income earners. Jacob Goldin and Katherine Michelmore find that 87 percent of filers in the bottom income decile of AGI are completely ineligible for the CTC, and “the majority of filers in the bottom thirty percent of the distribution are only eligible for a partial credit.”

Arguments for expanding the CTC usually assume that the cost of raising a child has increased and affordability has broadly declined. Relatedly, some proponents worry that U.S. fertility is below the replacement rate and believe that expanding government subsidies will meaningfully increase women’s lifetime fertility. Still, others focus on how larger income transfers could reduce poverty. The CTC is poorly targeted to meet each of these goals.

Poverty

Because the CTC phases in for filers with income over $2,500 at a 15 percent rate, the credit creates an incentive to work by adding a 15‐​cent subsidy to each additional dollar earned, until the full credit is reached. As is the case with the EITC, the work incentives are often partly or fully offset by the “income effect,” under which the subsidy allows a worker to meet his material needs with fewer hours worked.[1] Expanding the dollar value of the credit will have income effects that at least partially offset the work incentive.

To better target the lowest income families, others propose permanently increasing the credit and eliminating the earned income requirement, as was temporarily done in 2021 during the pandemic. Proponents claim that such a permanent change would reduce child poverty by more than 40 percent. Such estimates fail to account for how newly eligible families will change their behavior.

Taking behavioral effects into account, Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu estimate that the larger CTC without income requirements would lead 1.5 million workers to stop working (83 percent of whom would be the sole earner in the household). The net effect of expanding the CTC would reduce overall child poverty by 22 percent and would not reduce deep poverty (50 percent of the poverty line). Results from the Joint Committee on Taxation found that the expanded CTC would result in similar reductions in labor supply.

Corinth and Meyer estimate that any reductions in poverty from a larger CTC that is targeted at families without market income would come at a fiscal cost that is almost double that of other programs, such as food stamps. The CTC is neither an efficient nor an effective policy tool to reduce child poverty.

Cost of raising a child

Although Americans frequently cite affordability concerns as an obstacle to fertility, analysis indicates that family costs have not outpaced incomes and that the cost of raising a child has fallen, not grown, over time.

For example, Angela Rachidi compares family incomes to family‐​related costs and finds that family incomes have grown steadily since the 1980s and costs have generally not outpaced them. Instead, Rachidi suggests that family’s increasing expectations around—and consumption of—various goods and services (home size, vehicle ownership, clothing) drive perceptions of affordability decline. Moreover, various measures of social support and community support have declined in ways that may make it more difficult to raise a family.

Economist Jeremy Horpedahl similarly finds that the annual cost of raising a child in the United States has fallen from 21.8 percent of median family income in 1960 to 12.6 percent of median family income in 2020 for two‐​earner families, with the 2020 figure constituting the lowest cost yet (Figure 2). For single‐​earner families, the annual cost of raising a child in the United States fell from 27 percent of median family income in 1960 to 23.7 percent of median family income in 2020.[2]

Some proponents of the CTC argue that the presence of children reduces a family’s ability to pay and thus deserves an offsetting subsidy, regardless of whether the cost of raising a child is increasing or decreasing. While children do come with additional costs, so do many other decisions individuals and families make, such as living in a high‐​cost area for economic or educational reasons.

Lastly, subsidies could be counterproductive as they will tend to be captured as higher prices of child‐​related services without supply‐​side reforms to expand access. Although evidence indicates that family affordability is not broadly in decline, the price of core child‐​related goods and services could certainly be lower with regulatory reforms.

Fertility

U.S. fertility is below‐​replacement level and converging with the low fertility rates of other countries. Subsidies for families with children, including the CTC, have been proposed as one way to mitigate this decline. Such financial transfers or cash benefits are especially ineffective at reducing fertility decline.

A review of studies with experimental or quasi‐​experimental designs finds that financial transfers result in a short‐​term increase in births while leaving the long‐​term total unaffected. A United Nations working paper finds that financial transfers’ “impact on completed fertility is rather small… Furthermore, the effects of financial transfers usually have the biggest influence on fertility of the low educated, low‐​income, or jobless for whom public transfers are of higher value.”

As stated elsewhere, these low‐​income households rarely qualify for the CTC’s middle‐ and upper‐​income benefit. The CTC is thus doubly ineffective at increasing fertility: not only do financial transfers have a small or insignificant effect to begin with—altering fertility timing rather than total births—but the CTC does not target the demographic that would be most influenced to increase their fertility behaviors in the presence of financial benefits. Targeting low‐​income households comes with other costs to labor force participation and more fundamental questions about the prudence of governments’ involvement in fertility decisions.

A better way?

Although the CTC fails at many objectives, there are numerous options for state, local, and federal policymakers interested in supporting families and making family life easier. To increase affordability, reforms to housing, food, formula, and childcare policy should be enacted. To reduce stress, increase opportunity, and reduce the cost associated with buying a home in the “right” neighborhood, further reforms to educational choice must be adopted.

Parents typically have limited financial resources, but just as importantly, limited time. Enacting reasonable independence laws and reforming home supervision laws would reduce the time cost of parenting while providing growth opportunities for school‐​age kids. Overly burdensome car seat requirements, with little associated safety benefit, should also be reconsidered.

Adopting these reforms would do much more for parents and children than expanding the CTC. On the other hand, expanding CTC spending without deregulating the goods and services that parents demand would be counterproductive and regressive. Ultimately, Congress should repeal the CTC entirely.

[1] Incentives depend on whether a person is not working or working to begin with, and whether the worker’s earnings place them on the phase‐​in, plateau, or phase‐​out region of the benefit schedule. See here.

[2] Where single‐​earner families includes both single parent families and married couples where one parent is in the labor force.

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