Lizzie Dickerson

29 February 2024

A bipartisan group in Congress recently proposed expanding the child tax credit (CTC), enveloping tax policy within the larger social safety net. This is not the first time tax credits have been reshaped into welfare. During the pandemic, a legislation package titled the American Rescue Plan turned the CTC into a near-universal child allowance for just six months. Attempts to make that expansion permanent in 2022 were rejected by Republicans, in large part because it removed employment conditions from the tax benefit. This year’s bill is more moderate than its pandemic predecessor, expanding the amount families can receive while retaining work incentives for parents (1). However, focusing on the CTC as a tool to combat child poverty is a misguided choice. It’s true that expanding the CTC will add to the social safety net—but broadening other tax policies like the earned income tax credit (EITC) can build a ladder out of poverty for American families.

The CTC was originally dreamt up in 1993 as an income tax break for middle-class families. Over the next three decades, it expanded to assist parents who didn’t earn enough to pay income taxes (2). Today, families can receive a child tax credit as high as $2,000 per child, with those who don’t owe income taxes eligible for the “refundable” portion of the CTC—a direct cash transfer up to $1,600 per child. The American Rescue Plan increased the amount families could receive to a maximum of $3,600 per child and made the entire CTC refundable, meaning that parents did not have to earn income to be eligible for the benefit. Parents received this money as a monthly allowance until the end of the tax year, when the rest was sent to them as a lump sum (3).

The bill’s brief run produced dueling narratives about its results. Depending on who told the story, expanded and refundable CTC was either a godsend for struggling families or an excuse for parents to quit their jobs and live off of government welfare. Six months is a short time for either side to draw conclusions. Census data confirms that child poverty fell by 36% during that time, but studies on employment trends in those months were inconclusive (4). After all, parents’ choice to leave the workforce is a behavioral effect that can only be seen in response to permanent policy changes (5). If pandemic-era CTC had lasted, some economists predicted that a significant number of parents would leave the workforce, with one University of Chicago study putting the figure as high as 1.5 million (6). 

While this may be an overestimation, the reality is that significant financial support from the government risks incentivizing parents in low-income jobs to cut back their work hours. Some may weigh their opportunity costs and leave their jobs entirely. American society affords little dignity to many low-income jobs, equating lower wages with lower skills. Parents working jobs they find mundane or exhausting will likely choose to spend more time with their families if government support allows them to. However, by leaving the workforce, these parents may unintentionally limit their family’s financial future. A 2022 study by nonpartisan think tank ChildTrends demonstrated that long-term reductions in child poverty are correlated with parents’ labor force participation (7). Children whose parents remain in the workforce are more likely to be tracking away from poverty than those whose parents leave their jobs. 

This year’s proposed CTC expansion walks a fine line between the tax credit’s pandemic form and its current iteration. The bill would increase the refundable portion to $2,000 per child and allow parents to use their current or previous tax year’s earnings to claim the credit. Unlike pandemic-era CTC, parents must have worked at some point in the last two years to receive money. Those paying federal income tax also benefit more, in keeping with the CTC’s original design. Still, this policy makes it possible to opt out of employment for one year and benefit from the CTC (8). Scholars at the American Enterprise Institute (AEI) found that the employment impact of this bill would be net negative, with more parents incentivized to leave the workforce than enter it (9). Even this moderate CTC expansion has negligible benefits for families or the economy as a whole.

If lawmakers want to give hardworking parents a break while rewarding upward mobility, they should focus their attention on a different tax policy. The Earned Income Tax Credit (EITC) provides a nonrefundable tax credit to families, up to $3,584 per child, with childless workers eligible for up to $538. The EITC’s benefits are entirely tied to work, and it is already the most effective tax credit for reaching families at the bottom of the income distribution (10). Currently, the EITC offers a strong incentive for parents to remain in the workforce, yet does little to motivate work effort—workplace ambition that can power upward mobility (11). But unlike the CTC, a reimagined EITC could reward parents both for keeping their children out of poverty and also for securing their financial future. Scholars on both sides of the political aisle have called for lawmakers to focus on the EITC as the tax credit with the greatest potential to lift families out of long term poverty. To this end, three poverty scholars at AEI have proposed rapidly phasing in the EITC as parents begin to earn money, and extending the eligibility window to higher earners (12). At the Brookings Institute, economist Isabel Sawhill suggests expanding the EITC’s benefits for childless workers, many of whom are nonresident fathers or young adults building the financial basis for a family (13). Consensus across political affiliations indicates that this is a policy worth pursuing. Since the EITC is a completely work-based tax benefit, expanding it would avoid the CTC’s drawbacks.

This year’s CTC bill passed the House within a month of being proposed. Before lawmakers in the Senate give it an equally speedy stamp of approval, they should examine other ways to tackle child poverty. This policy may be well-intentioned, but applying a similar expansion to the EITC has the potential to lift families out of poverty in the long run, build self-sufficiency, and provide better returns to the economy as a whole. Beyond tax credits, reforms on the spending side of the budget could also power upward mobility. An increased minimum wage may incentivize parents to remain employed. Improved childcare options could give low-income children an educational boost (14). With a wealth of creative solutions before them, lawmakers are unintentionally shortchanging American families by giving this bill an easy pass.

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Works Cited

1. Watson, Tara. 2024. “The new Child Tax Credit deal is really a safety net deal—and by that measure it is only a start.” The Brookings Institute. https://www.brookings.edu/articles/the-new-child-tax-credit-deal-is-really-a-safety-net-deal-and-by-that-measure-it-is-only-a-start/.
2. Hodge, Scott A. 2022. “The Child Tax Credit Is a Failed Experiment.” The Wall Street Journal, November 28, 2022. https://www.wsj.com/articles/the-child-tax-credit-is-a-failed-experiment-expansion-refundable-workforce-handout-pandemic-liability-revenue-social-service-irs-11669645688.
3. Winship, Scott. 2022. “The True Cost of Expanding the Child Tax Credit (Published 2022).” The New York Times, December 20, 2022. https://www.nytimes.com/2022/12/20/opinion/child-tax-credit-basic-income.html.
4. DeParle, Jason. 2022. “The Expanded Child Tax Credit Is Gone. The Battle Over It Remains. (Published 2022).” The New York Times, November 25, 2022. https://www.nytimes.com/2022/11/25/us/politics/child-tax-credit.html.
5. Winship, Scott. 2022. “The True Cost of Expanding the Child Tax Credit (Published 2022).” The New York Times, December 20, 2022. https://www.nytimes.com/2022/12/20/opinion/child-tax-credit-basic-income.html.
6. Corinth, Kevin, Bruce Meyer, Matthew Stadnicki, and Derek Wu. 2021. “The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion | BFI.” Becker Friedman Institute. https://bfi.uchicago.edu/working-paper/2021-115/.
7. Thomson, Dana, Renee Ryberg, Kristen Harper, James Fuller, Katherine Paschall, Jody Franklin, and Lina Guzman. 2022. “Lessons From a Historic Decline in Child Poverty – Summary of Findings.” Child Trends. https://www.childtrends.org/publications/lessons-from-a-historic-decline-in-child-poverty-summary-of-findings.
8. Watson, Tara. 2024. “The new Child Tax Credit deal is really a safety net deal—and by that measure it is only a start.” The Brookings Institute. https://www.brookings.edu/articles/the-new-child-tax-credit-deal-is-really-a-safety-net-deal-and-by-that-measure-it-is-only-a-start/.
9. Corinth, Kevin, Angela Rachidi, Matt Weidinger, and Scott Winship. 2024. “The Work Incentive and Employment Effects of Eliminating the Child Tax Credit’s Annual Income Requirement.” American Enterprise Institute. https://www.aei.org/research-products/working-paper/the-work-incentive-and-employment-effects-ofeliminating-the-child-tax-credits-annual-incomerequirement/.
10. Sawhill, Isabel V., and Morgan Welch. 2021. “The American Families Plan: Too many tax credits for children? | Brookings.” The Brookings Institution. https://www.brookings.edu/articles/the-american-families-plan-too-many-tax-credits-for-children/.
11. Rachidi, Angela, Matt Weidinger, and Scott Winship. 2022. “A Safety Net for the Future: Overcoming the Root Causes of Poverty.” American Renewal. https://www.americanrenewalbook.com/a-safety-net-for-the-future-overcoming-the-root-causes-of-poverty/.
12. Ibid
13. Sawhill, Isabel V., and Morgan Welch. 2021. “The American Families Plan: Too many tax credits for children? | Brookings.” The Brookings Institution. https://www.brookings.edu/articles/the-american-families-plan-too-many-tax-credits-for-children/.
14. Ibid