How to fight poverty and boost work with an enhanced Child Tax Credit
The president’s 2024 budget, released today, calls for reinstating the 2021 expansion of the Child Tax Credit, which dramatically reduced child poverty.
The temporary effect of that one-year expansion on poverty rates was a remarkable feat — instead of what surely would have been an increase in child poverty while the economy was still weak, we saw a reduction in child poverty of more than a third. Those results made it clear that we could readily do better for our nation’s children on a permanent basis.
Yet, despite the celebrated reduction in child poverty, Congress let the expanded CTC expire last year over policy disagreements about specific elements of the CTC design.
The biggest sticking point in negotiations over making the 2021 CTC expansion permanent was whether to maintain the full refundability of the credit, meaning that even parents with no income would be eligible to receive the full credit amount of $3,000 for older children and $3,600 for children younger than six. The president’s call for reinstating full refundability is a non-starter for some congressional Republicans and centrist Democrats who worry that giving non-working parents large amounts of cash will discourage them from working.
In a new policy proposal released this week, we put forward a modified CTC design that addresses this and other concerns — it provides a bipartisan path forward. Our design maintains the overall anti-poverty effects of the 2021 expansion while encouraging the labor force participation of low-income parents. And it costs taxpayers less money.
Here’s how our modified design works: Like the 2021 CTC expansion, working parents with some (but still low) earnings would be eligible for a full credit amount of $3,000 for children between ages 6 and 17 and $3,600 for children under age 6. Families with no earnings — who receive no credit now — would be eligible for half the full amount: A still substantial $1,500 for children aged 6-17 and $1,800 per child under the age of 6. In our plan, phasing into the full credit happens much faster than under current law. For each additional $100 of taxable income, parents are eligible for an additional $30 in tax credit per child.
Our design addresses concerns about the negative effects on labor force participation of a permanent, fully refundable credit by significantly increasing the after-tax and transfer return on working additional hours for low-income parents. In addition, making only a partial credit available to non-earners mitigates concerns about sending amounts as high as $3,600 per child in unrestricted cash to out-of-work parents. But, crucially, by offering a partial credit rather than no credit to non-earning parents, our modified design delivers critical income assistance to children living in the most economically-disadvantaged households.
Another point of contention over maintaining the expanded CTC was the fiscal cost of the expanded credit. According to the Joint Committee on Taxation, the 2021 expansion added $109.5 billion in tax expenditures. Not all this extra tax spending was directed at low-income families. The 2021 expansion delivered increased amounts of credit income to high-income families.
Relative to current law, our design begins the phase-out of the full credit amount at a lower income threshold: $75,000 for single filers and $110,000 for married filers. These lower income thresholds keep the cost to the taxpayer down by not sending the full credit amount to very high-income families whose children are less likely to benefit from the additional income. But the credit amount phases out slowly (more slowly than current law), to avoid discouraging work among these higher-earning families, yielding a positive credit amount for families with one child up to $240,000 of taxable income for single filers and $440,000 for joint filers, as under current law.
Evidence-based estimates suggest that our compromise CTC would reduce child poverty by 34 percent, roughly equivalent to the reduction in poverty that would be achieved by a reinstatement of the 2021 CTC expansion. Furthermore, our CTC design is predicted to increase the number of parents in the labor force by 80,000; this contrasts with a predicted reduction of 540,000 workers under a permanent reinstatement of the 2021 expansion.
Our proposal would add $88 billion in tax expenditures, relative to the current CTC. An obvious way to reduce this fiscal cost would be to reduce the credit amount available to higher-income families. This might have some political cost, but it would be well justified on policy grounds. Shaving costs should not be achieved by reducing the credit amount available to low-income families; there is far too much evidence of the many benefits of alleviating child poverty for that.
The U.S. federal government should provide robust and predictable income assistance to economically vulnerable children who, by happenstance of their birth, are living in a household with limited income or out-of-work parents. Congress found a way to do that in 2021. It worked.
Let’s build on the success of that experiment with reasonable tweaks that offer a lasting, bipartisan way forward. Our proposal for an enhanced Child Tax Credit delivers substantial credit amounts to low- and moderate-income families and encourages parental labor force participation. It is an investment that will reap high returns.
Melissa S. Kearney is the director of the Aspen Economic Strategy Group and the Neil Moskowitz Professor of Economics at the University of Maryland; Wendy Edelberg is the director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution.
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