The Latest Child Tax Credit Modifications Will Cost More Than a Pretty Penny: Let's Not Make Them Permanent

Former Chicago Mayor Rahm Emanuel once say that you never let a crisis go to waste. The government certainly does that in respects to expanding power and clout in an emergency. We saw that when the U.S. government spent $1.9 trillion on a supposed relief bill that had little to do with pandemic relief. One of the features of that bill, the American Rescue Plan Act of 2021 [ARP], was the expansion of the child tax credit [CTC]. Per the IRS, the goal of the expansion is to reduce child poverty. The ARP's CTC expansion has three main components. The first is that the maximum credit increases from $2,000 per child to $3,000 per child ($3,600 if the child is under 6 years old). Second, the CTC now includes 17-year olds. Third is that the CTC is now fully refundable. The last part is important because as the Tax Policy Center (TPC) points out, it makes the tax credit more accessible to households in the lowest quintile. 

Last week, Biden proposed the American Families Plan [AFP], a major spending bill focused on families and children. The Ivy League Wharton School of Business found in its analysis of the Plan that it would cost $2.5 trillion, which is $700 billion more than the White House estimate of $1.8 trillion. Included in the Plan are two modifications of the CTC. One is that the expansion in the ARP would be extended to 2025. The second is that the CTC would remain permanently refundable. Let's forget for a moment that the AFP as a whole is estimated to reduce the GDP by 0.33 percent by 2031 and increase the government debt by 6.2 percent by 2031 (Wharton). I previously covered the CTC in 2015 and 2016, but I really want to get into the issues with the recent expansion from the ARP and the proposal of the AFP.

The main argument for the CTC expansion is that of poverty reduction. The CTC helps to reduce tax liability for parents with dependents. If it reduces poverty, it must be a good deal, right? The Left-leaning Urban Institute estimates that the CTC from the ARP would reduce poverty by one percentage point, to 12.8 percent (Wheaton et al., 2021, p. 4). Similarly, the Left-leaning Center on Budget and Policy Priorities goes as far as estimating that the CTC and EITC in the ARP will collectively reduce child poverty by 40 percent. 

That sounds nice until you get into the issue of making the CTC refundable. On the one hand, it does provide greater access to the CTC for lower-income households. On the other hand, it takes a tax credit and de facto turns it into a direct cash transfer. The Right-leaning American Enterprise Institute puts those estimates from the above Left-leaning think-tanks into question with a report on child allowances (Winship, 2021). In this report, Winship outlines how government cash transfers such as the CTC substitutes work income, thereby undermining efforts to reduce unemployment. This is especially true since this will be the first time in U.S. history that cash benefits will be extended to nonworking parents. As an additional point, AEI scholar Angela Rachidi touches upon the fact that increases under the ARP will barely get many families above the poverty line, thereby doing little to create a long-term path out of poverty. 

We have already seen this phenomenon play out with another direct cash transfer: unemployment benefits. When unemployment benefits reach a certain level, they disincentivize work. As research from the Right-leaning Heritage Foundation illustrates (Rector et al., 2020), the Earned Income Tax Credit [EITC] did not succeed at reducing poverty or increasing employment. 

Seeing what has happened with other direct cash transfers such as unemployment benefits and the EITC, I am concerned that the refundability and the increase of the CTC size will act in contrary to the intent of poverty reduction and improving employment figures. In case diminishing the primary argument is not adequate, let's take a few other factors into consideration.

• Cost of the CTC. The Congressional Budget Office [CBO] estimated that the expansion under the ARP is going to cost us $88.8 billion over the next ten years. If we were to make the CTC permanent, the Right-leaning Tax Foundation found that it would cost $1.6 trillion over ten years.
• Tax Code Neutrality. The CTC is a provision in the tax code that incentivizes child rearing. Why should childless households pay for those who decide to have children? What business does the IRS have in punishing or rewarding people for the size of families they choose to have or whether to have children? 
• Getting At the Root of the Problem. Advocates of the CTC argue that childcare is too expensive. The issue with a CTC, especially one with refundability, is that it is de facto acts as a demand-side subsidy. What happens when you increase demand while supply stays the same? It increases prices, which is a point I have brought up with federal subsidies towards college loans and LIHEAP. So how does the CTC lower childcare prices?  It does nothing to address the rising cost of education, healthcare, or food. It does nothing to contribute towards welfare reform. It is just more money being handed out, which is the premise behind a direct cash transfer. If the cost of childcare is the problem, then we need to find ways to reduce the costs. I can save this topic for another time, but I will leave with one suggestion that was brought up by the libertarian Cato Institute (Bourne, 2018). Regulations on childcare facilities include stringent staff-to-child ratios. If we were to loosen the ratio regulations, it could lower childcare costs from 9 to 20 percent. If we were to put our focus on the drivers of high childcare costs, we could provide a more targeted and less costly solution to affordable childcare. 

October 8, 2021 Addendum: Researchers from the University of Chicago recently released a working paper on the effects of Biden's CTC requirements (Corinth et al., 2021). One result is that 1.5 million workers (or 2.6 percent of working parents) would leave the workforce. The second is that it will do nothing to reduce deep child poverty. Third, with the new data used in this study, it shows that the effects of reducing general child poverty have been overstated in other studies.