Expanding the Federal Child Tax Credit Comes with Pros and Cons
Advocates of the child tax credit laud the subsidy program for its ambitions to tackle poverty, ease middle‐class family finances, and boost falling fertility rates. Unfortunately, it fails at each of these goals.
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The current $2,000 credit costsabout $1.2 trillion over 10years. Democrats’ proposed extension of the larger 2021 pandemic‐era credit would more than doublethe cost to roughly $2.8 trillion—a full trillion more than the much‐derided revenue reduction of the 2017 Republican tax cuts.
However, the clamor for spending ever larger sums of money through the tax code has left acritical question unanswered: Is the child tax credit serving its intended purpose?
Unlike the earned income tax credit, cash aid, food aid, and public health care, the child tax credit is primarily asubsidy for middle‐ and upper‐income Americans. Families making as much as $400,000 ayear can claim the full credit as currently designed.
According to a2021 Congressional Budget Office estimate, only 19% of child tax credit expenditures are claimed by the lowest quintile of income earners. The poorest Americans are fully ineligible due to the income requirements.
To better target the lowest‐income families, Congress could eliminate the earned income requirement, as was temporarily done in 2021. Proponents claim that such apermanent change would reduce child poverty by more than 40%. However, such rosy estimates fail to account for how newly eligible families will change their behavior, often by working less.
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Not every problem can be solved with more cash.
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Considering behavioral effects, researchers estimatethe larger child tax credit without income requirements would lead 1.5 million workers to stop working—83% of whom would be the sole earner in the household. Expanding the credit would reduce overall child poverty by 22% and wouldn’t reduce deep poverty, defined as below 50% of the poverty line. This modest poverty reduction would cost nearly twice as muchas those of alternative programs such as food stamps.
Other proponents argue we need larger child subsidies to offset the rising cost of raising achild. While the costs associated with raising children are significant, they haven’t outpaced income growth over the last 60years.
The annual costof raising achild in atwo‐earner family fell to 13% of median family income in 2020 from 22% in 1960. While children do come with additional costs (and benefits!), so do many other decisions individuals and families make. And additional subsidies will tend to feed inflation, making it more, not less, expensive to raise afamily.
Some proponents rightly worry that Americans aren’t having enough kids, driving US fertility well below replacement. But not every problem can be solved with more cash. Financial incentives have demonstrated minimal impacton fertility rates, particularly in the long term.
As an anti‐poverty program, the child tax credit doesn’t target those most in need. To address child poverty, Congress should focus on streamlining the myriad purpose‐built programs funded through annual appropriations. Family affordability is better addressed with deregulation to increase supply in critical areas such as housing, education, and child care.
Ultimately, Congress should focus on more targeted reforms and should repeal the child tax credit. The additional revenue should be plowed into lower tax rates, which would benefit all Americans.