Child Tax Credits Should Promote Work, Not Undermine It
President Biden and Congressional Democrats’ plan to increase taxes and expand federal spending includes a list of changes that would affect most sectors of the economy and discourage a return to work for many of America’s most needy families.
One particularly worrying change would extend temporary pandemic-related expansions of both the Child Tax Credit (CTC) and the Child and Dependent Care Tax Credit (CDCTC) that were originally included in the American Rescue Plan Act (ARPA). Before the temporary changes, families could receive a CTC of up to $2,000 per child and a CDCTC of generally up to $1,200. Because the credits were intended to help working parents, the CTC program required a minimum annual income of $2,500, and since the CDCTC was not refundable, households must have earnings and pay taxes to claim the credit.
The Democrats’ proposals would permanently remove the earnings requirement, effectively eliminating the CTC’s work incentive and thus increasing incentives for non-work. The expanded credit would be as much as $3,600 per child. The CDCTC would also see a significant expansion in value and a similar removal of income requirements. If made permanent, these two program expansions could cost taxpayers as much as $1.7 trillion over the next ten years.
Work is one of the most important paths out of poverty for parents and their children. By not requiring a job to receive benefits, the Democrats’ proposal could lead many lower-income Americans to work less or entirely sever their connection to work.
Disincentives to Work in the Expanded Child Tax Credit
Proponents of the expanded CTC make the simple claim that giving families more money will increase family incomes and reduce child poverty by about half. However, their estimates fail to account for how the expansion of the CTC could depress work and undermine the overall well-being of parents and their children.
In their new working paper, Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu take the work incentives into account and estimate the proposed CTC extension would lead 1.5 million workers to exit the labor force. Most of the lost work would be among families losing their only earner, rather than families switching to a single-breadwinner model. The researchers estimate that single-parent households would make up 83 percent of the families with workers exiting the labor force. Additionally, more than half of the families exiting the labor force would earn less than $30,000 a year—or less than half the median household income—meaning the work disincentives would disproportionately affect lower-income families with weaker ties to the labor force.
After accounting for the projected decline in labor force participation among low-income parents, the authors show that the expanded credits do not reduce deep child poverty (families with income below 50 percent of the poverty threshold are considered to be in deep poverty), and overall child poverty declines by 22 percent or about two-thirds as much as previous estimates. The estimated decline in child poverty comes at a high fiscal cost. In terms of cost per child lifted from poverty, the expanded CTC would be the costliest of all means-tested welfare programs, totaling nearly $30,000. This is significantly more than the $16,000 spent per-child lifted out of poverty on food stamps or the $21,000 spent through the Earned Income Tax Credit (EITC), according to estimates by Meyer and Corinth.
Longer term effects on both parental income and children’s well-being are harder to model, but no less important. For example, the negative effect of a parent leaving the labor force could be long-lasting if they never return to work, or if they return at a lower wage than they would have received had they stayed employed. Taking time away from the workforce can mean skills and networks atrophy, making re-employment harder and lowering lifetime income.
Parental disconnection from work can also harm the well-being of children. After the 1996 welfare reform, which added work requirements into the cash-assistance program Aid to Families with Dependent Children (AFDC), employment among disadvantaged single mothers increased and they benefited from a resulting increase in material well-being. By reversing these positive gains, changes in to the CTC could lead to less work and lost economic gains for single mothers. Children without a working parent often fail to build their own connections to work when they grow up. Researchers have found that children from disadvantaged families who were exposed to the 1996 welfare reforms have also been shown to experience less food insecurity in adulthood, have a greater likelihood of graduating from college and are more likely to be married, compared to similarly disadvantaged children with fewer years of exposure to welfare reform.
Disincentives to Work in the Child and Dependent Care Tax Credit
Another similarly consequential proposal in the Democrat’s plan is the permanent extension of ARPA modifications to the CDCTC. The modifications expand the value of the credit from a maximum of $1200 to up to $8000 for families with two or more qualifying children, and the credit is made refundable, eliminating the requirement to have a positive tax liability. The changes would effectively eliminate the work requirement to claim the CDCTC’s partial reimbursement of child and other care costs.
For a credit that is intended to offset the cost of child care for working parents, removing a requirement to work seems to undermine the purpose of the credit. Combined with changes to the CTC, the proposed changes to the CDCTC pose an unprecedented expansion of government assistance, and as such, have the potential for significant negative effects on labor force attachment among low-income households.
The Social Capital Project has proposed reforming the CDCTC by repurposing it from a tax credit for families who pay for child care, into a more generally available benefit for parents of young children regardless of whether a child is cared for by parents or by a formal childcare provider, e.g. center-based day care. The current credit is biased toward the preferences of dual-earner and high-income families who tend to use formal childcare. The Democrat’s proposed expanded credit would make the lopsided preference worse, while simultaneously undermining the intended link between work outside the home and the associated childcare benefit.
Expanded Credits Could Reduce Family Stability
In addition to the work disincentives and the high fiscal cost of the program, this major expansion of means-tested assistance could have a significant effect on family formation and family stability. The proposals could encourage single parenthood, which would have long-run costs of deeper child poverty, less economic mobility, and poorer social outcomes.
As former Joint Economic Committee Republicans’ Executive Director Scott Winship notes:
“In the same way that safety net benefits make it possible to work less, additional income from the CTC makes it more feasible to raise children outside of marriage. In response to more income and declining returns to having earnings, some parents (disproportionately mothers) will choose to leave their marriage and take their children with them, while some (disproportionately fathers) will choose to leave and to leave the parenting to their ex. Other couples will find out-of-wedlock childbearing marginally easier: Either the mother, the father, or both may feel the mother has less need of the father’s support. More couples will find themselves with nonmarital, often unplanned, pregnancies and choose not to marry in the first place.”
By implicitly subsidizing non-working single-parenthood, the proposed CTC and CDCTC expansions could further erode the benefits that come from stable two-parent households. Children raised in married-parent homes are less likely to experience poverty, have higher educational attainment, experience better health, and are less likely to participate in delinquent behavior, compared to children raised outside an intact family. Children raised in communities with a higher share of married parents are also more likely to achieve upward mobility, even if they are not raised in married-parent homes themselves.
Giving low-income families more money will boost household incomes and reduce poverty in the short-term for some, but will likely have offsetting negative effects that decrease many families’ earnings and long-term well-being. Support for lower-income Americans should promote work, rather than undermining it. Toward this end, Senator Mike Lee has long supported the original design of the CTC as an important way to support working families.
Congress could further strengthen incentives to work in other federal safety net programs, such as Temporary Assistance for Needy Families and food stamps. Policymakers could also open up work opportunities to more people by reforming occupational licensing laws, removing barriers to flexible and gig economy work arrangements, and exploring ways to help the formerly incarcerated re-connect with the labor force.
Policies that support work can help more American families, particularly those most in need, build self-sufficiency and thrive in their communities.
Senior Policy Advisor
 Depending on the child’s age and family income.
 Estimate from the Tax Foundation’s ten-year cost estimate of making ARPA’s expansion of the CTC permanent and ten-year cost estimate of the CDCTC expansion as included in the House Ways and Means plan. Information on the changes in ARPA to the CTC and the CDCTC can be found in CRS’s analysis from May 2021.