The policy is a true budget buster and is ineffective in the long term
By Veronique de Rugy.
"In the well-intentioned rush to support American families by
expanding the child tax credit (CTC), critical questions are often
ignored: Aren't we already doing enough, and is this the best way to
help? It's imperative to step back and examine the assumptions at the
heart of this ongoing debate.
The child tax credit was first
introduced in the 1997 Taxpayer Relief Act as a way to lower the tax
burden for working families, with a $500 per child credit. It was
increased a few times, including during the Bush years and in 2017
during the latest Republican tax reform. The justification has morphed
into whatever its advocates happen to think it should be: It's an
anti-poverty program—hence its refundability. It's a pro-family
program—hence its growing size. It's a fertility booster program—hence
both its size and refundability.
While it's not that great at meeting any of these goals, it is a true budget buster.
At current levels, it costs about $1 trillion over 10 years, a price
tag that will grow if it is expanded. For the 2024 tax year, the CTC
will be worth $2,000 per qualifying child with $1,700 potentially
refundable through the additional child credit. The House of
Representatives just passed an expansion that, if passed untouched by
the Senate, would extend more benefits to lower-income families. The
maximum refundable amount per child would increase from $1,600 to $1,800
for 2023 taxes filed this year. It would also grow depending on
inflation. And it would only require work every other year, which is a
first step into turning the credit into a universal basic income for
families.
Ignoring that the CTC sits on top of roughly 80 or so other
welfare programs—many of which are already targeted at
families—advocates of the CTC expansion argue that to make it a better
anti-poverty measure we should eliminate the work requirements. Assuming
no behavior changes, the expansion would certainly provide more
government cash for eligible families—but it complicates things further
by creating disincentives to work and rise from poverty, especially as
it builds on other existing transfers.
Research by Kevin Corinth
and Scott Winship at the American Enterprise Institute highlights the
fact that after the proposed Wyden-Smith expansion, a single parent with
three children earning $15,000 annually would get $11,244 from the
Supplemental Nutrition Assistance Program (SNAP), $6,750 from the Earned
Income Tax Credit (EITC), and $5,400 in CTC money. That adds up to a
little more than $37,000 (ignoring many other benefits).
Tragically—because of both the way higher earners are phased out and the
generosity of the cumulative benefits—if that same single mom's work
earnings nearly tripled to $40,000, she'd take home only some $5,000
more. Indeed, making more than $39,000 means losing all of SNAP and some
EITC.
It isn't hard to see how this system, despite creating
some work incentives at first, discourages people from pursuing better
long-term paths for their families. This is a big deal. Increased
employment among low-income parents as a result of work requirements has
driven much of the long-term decline in child poverty, as we learned
during the welfare reform of the 1990s. We need stronger incentives to
move up the income ladder rather than incentives that perpetuate
systemic poverty. And this expansion of the credit isn't going to cut
it.
Unfortunately, many on the right are willing to ignore the
disincentive to work because they worry about declining fertility rates.
That would be a valid argument if, and only if, we had evidence that
more government spending or more tax credits were effective at lifting
fertility rates after they drop below replacement rates. And that isn't
the case.
As noted by Adam Michel and Vanessa Brown Calder, the CTC, other
financial transfers, and cash benefits are unlikely to be a cure for
what ails us. A review of relevant studies "finds that financial
transfers result in a short-term increase in births while leaving the
long-term total unaffected."
A better way to go would be to boost
economic growth so that families have more income in the first place.
One way to do this is to cut and flatten tax rates, which would change
incentives to save, invest, or be entrepreneurial. Also advisable is
doing away with the excessive regulations driving up the cost of things
families need, like housing, food, formula, and child care."