The Child Tax Credit Is a Failed Experiment

I introduced the idea in a 1993 Heritage Foundation paper. It was a lot better in theory than in practice.

By Scott A. Hodge. Excerpts:

"The expanded credit was one of many relief programs available to families in 2021, and it contributed significantly to increasing the number of households with little or no income-tax liability. According to a Tax Policy Center estimate, some 74 million tax filers—or nearly half (48.3%) of all filers in 2021—had no income tax liability."

"Handing a family $3,000, $6,000 or even $9,000 in cash is certainly palliative, but does it truly improve long-term living standards? No. On the contrary, recent studies estimating the economic effects of the proposed expansion suggest that it would cause people to leave the workforce, reduce work effort, and lower capital investment, ultimately shrinking economic output.

A recent study by economists at the University of Chicago determined that without any changes in behavior, expanding the credit would reduce child poverty by 34% and “deep” child poverty—families whose income is less than half the poverty level—by 39%. But those gains would come at a cost: the diminution of the workforce by 1.5 million people. Consequently, fewer working parents would diminish the child tax credit’s impact on reducing child poverty by more than a third, to 22% from the initial estimate of 34%.

A new study by Congress’s Joint Committee on Taxation assesses both the budgetary and economic impact of expanding the child tax credit. First, JCT determined that it would be a budget-buster, reducing revenue by more than $1.3 trillion over the next decade. By contrast, all provisions of the 2017 Tax Cuts and Jobs Act combined reduced revenues by roughly $1.5 trillion over a decade."

"JCT’s economic models predict that over a decade the policy would reduce the labor supply by 0.2% and reduce the amount of capital by 0.4%. As a result of the reduced supply of labor and capital investment, gross domestic product would shrink by 0.2%."