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Why the child tax credit matters

Economist and congressional adviser Robert Moffitt discusses how the American Rescue Plan's monthly allowance is lifting children out of poverty, cutting food insecurity, and investing in children as a society

When Congress tasked a group of economists and social scientists in 2015 to study ways to cut child poverty in the U.S. in half, one finding stood out. More than any other policy, a "child allowance" of about $3,000 per year, per child—similar to what most industrialized countries provide—would have the most impact, according to the final National Academy of Sciences report.

"We looked at all sorts of policies—welfare, food stamps, Medicaid, subsidized housing—but the child allowance was the biggest kicker," says Robert Moffitt, a Johns Hopkins University economist who served on the National Academies committee.

"The philosophy is, children are important for the future of our country—they need to be well fed and safe, they need quality health care, and when they grow up, those investments will benefit us all."

The topic has come under fresh scrutiny this year, as the American Rescue Plan in March ushered in historic changes to the U.S. child tax credit policy. Now most American parents or guardians can receive up to $3,000 per year for each child between the age of 6 and 17, and $3,600 per year for each child under 6. And unlike the former credit, this one is fully refundable—meaning you don't have to file or owe taxes in the first place to receive it—and a portion is delivered monthly rather than annually as a tax refund. Under the new system, for example, a married couple making less than $150,000 with two kids under 6 is eligible for $7,200 this year—more than $3,200 more than their previous credit.

Last week congressional Democrats arrived at a spending framework that extends the child tax credit until 2023, but some want to see the policy become permanent. Debate also persists over the finer details, including which income levels should be eligible.

In a recent conversation with the Hub, Moffitt offered insight on the policy's significance and possible future.

What type of early evidence do we have on the policy's impact?

We know that many poor children in working-class families are already receiving it—62 million kids in October, for example. Every indication is that the money going to poor children will greatly reduce the poverty rate in 2021. Also, some related effects may already be visible, including a 25% drop in food insufficiency for low-income families within the first month of the tax credit.

We may never be able to track exactly where families are spending the money. Theoretically, they can spend it on anything, and that's not necessarily a bad thing. In some low-income families, for example, the money might go toward paying down debt, or car loans, or fixing the dishwasher. And some investments can stream down indirectly to children: For example, a mother who puts money toward buying a car so she no longer takes two buses to work—the kids get the benefit of more time with her.

Why is it important that this credit is fully refundable?

Making it fully refundable means you get it regardless of family income. Without that feature, the impact is limited. The U.S. has had a child tax credit since 1998, and it's been tweaked a little here and there, but overall it's never been fully refundable until the American Rescue Plan. Previously, you only got a credit against taxes already owed. So the problem is that poor families who don't have income—at least $15,000-$20,000 for example—to pay tax taxes didn't receive the credit at all, and those with low incomes paying low taxes didn't get much. Most benefits would really only start with the middle class, while lower-income families were missing out on money that could be truly meaningful for them.

Why is that framework controversial?

There are a few reasons people may be opposed. One is the economic impact: This policy costs more than $109 billion extra on top of the $126 billion we were already spending on the tax credit, so that causes ripples in the broader economy.

Some don't like that there's no requirement for work. The old system was set up so a person would work and pay their regular taxes and earn the child credit that way. With the new policy, I think there's a view out there, particularly among moral conservatives, that it's providing a handout that makes people more dependent on welfare programs.

Among liberals, there's disagreement over which income levels should warrant the credit. Some believe if we make it fully refundable, we should really be concentrating benefits on the very poor. The Biden administration's plan allows some form of credit until you make up to $400,000 per year, which goes very much into the upper middle class.

So what rationale supports keeping the credit for higher incomes?

I think there's a broad feeling that the United States should be, in a general way, investing in children as a society. Almost every industrialized country in the world has a child allowance already—in western Europe, Scandinavia, the UK, Australia, Canada.

The philosophy is, children are important for the future of our country—they need to be well fed and safe, they need quality health care, and when they grow up, those investments will benefit us all. Then, you know, children are expensive for everyone regardless of income. A lot of middle-class families may put the benefit toward child care, tutoring, enrichment, stuff like that—which, again, may help later on. Even many conservative viewpoints embrace this kind of philosophy.

What's the impact of distributing the payment monthly rather than as a lump sum?

It's interesting, because almost all other industrialized countries do something like this monthly, and many researchers have identified that frequency as important. If the credit only arrives once a year as a refund or credit at tax time, it doesn't help people with day-to-day struggles and bills, and unexpected expenses like car repairs. A couple of years ago a Federal Reserve Board survey found that about 40% of the U.S. doesn't have an extra $400 to spare. So this credit can serve as a patch.

Administratively, it's complicated. The IRS has never been in the business of sending monthly checks to the majority of the population. But other countries that provide a child allowance have figured out how to do that.

Are there any countries that could serve as a good model for the U.S.?

Canada is a good one, our neighbor to the north with a very similar economy and demographics to ours. Their poverty rates are lower than ours, and their government spends more on traditional welfare programs, but in other ways they're very close.

Canada's child tax credit, which started in 2016, has been considered a smashing success there, politically and economically. They found their poverty rate fell by 5%. Their program phases out at lower income levels than the current one in the U.S.—it's relatively more concentrated on the poor—but overall similar in structure.

"With the child tax credit, we now have people getting used to this benefit and a lot want to keep it. Politicians who support it view this as their big moment, a chance that's not coming back soon."

In your opinion what are the flaws of the current U.S. setup?

One problem is many poor families aren't getting the American Rescue Plan child tax credit at all, and the reason is they've never filed taxes. They're not in the system. The U.S. differs from a lot of other countries that offer government IDs not tied to their jobs, which is a whole other topic.

People who have never filed taxes due to poverty do have the option to go to the IRS website and register. But, for some families, that can be a struggle. Maybe they don't have a computer or Wi-Fi access, or they're intimidated by what may seem like a difficult bureaucratic obstacle. Certainly undocumented immigrants have reasons to stay away. But on the federal side there are also huge administrative issues to resolving all these issues.

Do you believe this expansion could have happened in the U.S. without pandemic?

You could say it was Biden's election in general and the introduction of more liberal policies that were in reaction to the pandemic. What's amazing about the pandemic is that when you add up all the programs and billions of dollars for families—not only the child tax credit, but the earlier stimulus payments and unemployment insurance and things like that—the U.S. poverty rate did not rise during 2020. In fact, it fell a little due to all the cash that was funneled out.

With the child tax credit, we now have people getting used to this benefit and a lot want to keep it. Politicians who support it view this as their big moment, a chance that's not coming back soon.

But the idea has been on the agenda for liberals for many years. Senator [Michael] Bennett repeatedly introduced a form of this every session, so it's been discussed in the Washington subsurface. I think the only reason it wasn't a major topic in the media and general public is that people considered it unfeasible, a political non-starter. The pandemic played a role in changing that.