ALLISON SCHRAGER Opinion Bloomberg
The enhanced child tax credit has expired and I, for one, will not regret it. You neither.
Of course, it was hugely popular – who doesn’t love getting more money from the government? But this is not a good policy. Taxpayers and credit recipients deserve better.
Here’s a quick rundown: The enhanced tax credit succeeded the $2,000 version that was part of the 2017 tax reform. The credit was increased last year by the Joe Biden administration to $3,600 per year for each child under age 6 and $3,000 for older children, with half of that paid monthly and the rest claimed on your tax return. Each family received the same amount up to an income ceiling. The pandemic-inspired enhancement was set to expire at the end of 2021, when the credit returned to the previous $2,000. The president’s Build Back Better plan would extend the increase, but that proposal is in limbo as the bill remains stalled by opponents in Congress.
Since the expiration of enhanced credit means families will lose money compared to last year, some economists and experts argue that the program should be preserved, as it has been so successful in achieving its goal of reducing child poverty. Don’t believe the hype.
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The enhanced CTC may have had intentions, but it’s not entirely clear what they were. Based on the White House’s timeline and communication, it aimed to reduce child poverty and provide relief to families during the pandemic. The pandemic rationale never made much sense. Between economic impact payments, enhanced unemployment benefits, the moratorium on evictions and the pause in student loan payments, most families were no worse off financially than they were before the pandemic. Presumably, then, the improved CTC was meant to achieve the larger, pre-existing goal of reducing child poverty while providing relief to cash-strapped middle-class families. And who can argue with these goals?
The arguments for a permanently greater right to the middle class are not so strong. Maybe the United States should have a great state of rights for middle-class and upper-middle-class working families. But it’s not a cheap program, and it represents a big shift in American welfare, which traditionally targets the poor, disabled and elderly.
The improved CTC costs more than $100 billion a year, and $1.6 trillion over the next 10 years if it becomes permanent – more than is spent on food stamps, income support for low income and housing assistance. Essentially, more credit means choosing either less money for other programs or European-sized taxes. It may be our future, but there are trade-offs in terms of expense and less efficient economy.
It is easier to advocate for the reduction of child poverty. Before the pandemic, about 14% of American children lived in poverty, compared to 12.8% of children in other OECD countries. It’s shameful for the richest country in the world. And as proponents of the new CTC point out, it has reduced poverty. The reduction in child poverty is estimated to be around 34% and it may have reduced food inadequacy by 27%. It’s not surprising ; if you send a lot of checks to the families, they will have more money.
But reducing poverty does not necessarily mean it is good policy. First, the pandemic is still raging. We really don’t know how the enhanced CTC works in normal times and in a normal job market. For example, many poor children have not attended school regularly, which is a source of food through the free meals program. And perhaps child poverty could be reduced in other more effective ways that would cost taxpayers less.
According to these standards, the improved CTC is insufficient. By one estimate, only 57% of households earning less than $25,000 even got the credit because it’s administered by the IRS and very low or no income people don’t always file. The enhanced CTC aims to reduce poverty, but compared to other government programs, a smaller fraction of the money goes to low-income people. This is due to the substantial benefits paid to middle and upper class wage earners.
It is sometimes claimed that it is necessary to offer the credit to high earners because if you take away benefits as people earn more, it discourages advancement. But the current version of the CTC also has harmful distortions. The 2017 CTC created work incentives by increasing the credit amount as income increased (up to $30,000 in income). By removing this feature and offering a lump sum credit (within a higher income limit), reduces the back-to-work allowance (the money you would get from working versus not working).
For some people, the return to work has diminished considerably. Economists believe the cut is equivalent to eliminating the Earned Income Tax Credit, a federal subsidy that increases people’s return to work because income is required to qualify. If we believe that the EITC has succeeded in getting people to work (and most economists do), it stands to reason that the improved CTC must discourage it. Economists believe that as the economy returns to normal, the reduction in work could undo the improvement in deep poverty that credit has brought during the pandemic.
The upgraded CLC may have good intentions to reduce child poverty, but creating a large middle-class rule of law and undermining work incentives is not good policy – taxpayer spending aside. There are better, more targeted alternatives, such as welfare reform.
Policy should be judged on its execution, not just its intent. This is a problem shared by many Build Back Better programs. Just because a policy has good intentions, whether it’s more affordable child care or poverty reduction, doesn’t mean it’s a good policy. How he actually solves the problem is what matters most.
Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk”.