Extending Child Tax Credit will push over a million working parents out of the labor force

At the beginning of 2021, Congress passed a $1.9 trillion stimulus package –– namely the American Rescue Plan Act –– which among other things, expanded the maximum Child Tax Credit (CTC) to $3,000 for any child between 6 and 18 years, and $3,600 for any child under 6, up from $2,000. The full credit is available to single parents making under $75,000 and couples earning under $150,000.

In his $3.5 trillion spending proposal, Joe Biden seeks to extend the expanded CTC till 2025 and make the full credit available to all low- and middle-income families regardless of income or earnings.

Certainly, reducing child poverty rates is a noble goal, but there are a lot of downsides to using government spending for such ends. Not only are anti-poverty programs costly, but they heavily disincentivize work, ultimately canceling out the intended benefits. Extending the CTC will not be any different.

Extending the CTC will disincentivize work

Indeed, according to a newly published NBER working paper, researchers do estimate that ignoring any behavioral responses, expanding the CTC will indeed “have a large anti-poverty effect on children than any existing government program”. However, the program would be less cost-effective, spending more dollars per family to keep a child out of poverty than other means-tested programs.

Moreover, benefits are not means-tested, so the lowest-income families will receive only a tiny fraction of benefits. The expanded CTC, for example, allocates 15 percent of funds to families at the bottom income decile while the Earned Income Tax Credit (EITC) –– which is means-tested –– allocates 20 percent.

The biggest drawback of expanding the CTC comes from its disincentives to work. After accounting for how parents would respond to extra income with no work requirements, researchers find that the program will discourage work, pushing over a million working parents out of the labor force.

As the authors explain,

…. By replacing the TCJA CTC (which contained substantial work incentives akin to the Earned Income Tax Credit) with a universal basic income-type benefit, the CTC expansion reduces the return to working at all by at least $2,000 per child for most workers with children. Relying on elasticity estimates consistent with mainstream simulation models and the academic literature, we estimate that this change in policy would lead 1.5 million workers (constituting 2.6% of all working parents) to exit the labor force.

Consequently, earning losses due to parents exiting the labor force would reduce the anti-poverty effects of the program. The Researchers estimate that accounting for behavioral responses, “child poverty would only fall by 22% and deep child poverty would not fall at all with the CTC expansion.”

Ultimately, making the expanded CTC permanent would only trap more parents and kids in poverty while wasting billions of taxpayers’ money each year.

Growing the economy lifts people out of poverty

The US Census Bureau reported that between 2018 and 2019, median household income in the United States grew by 6.8 percent. During that same period, the official poverty rate declined to 10.5 percent from 11.8 percent. There were approximately 4.2 million fewer people in poverty in 2018 compared to 2019. Additionally, the poverty rate for children 18 and under declined by 1.8 percentage points from 16.2 percent to 14.4 percent.

Not only that, but according to the Census Bureau, the 2019 poverty rate was “the lowest rate observed since estimates were initially published in 1959.” This, however, did not happen due to increased government spending on anti-poverty programs. On the contrary, a growing economy led to high rates of employment –– or very low unemployment rates –– as well as wage hikes, increasing incomes among individuals.

For sustainable poverty alleviation, lawmakers should instead focus on enacting policies that will grow the economy and create economic opportunities for parents to scale up. The idea that government spending is the only way to lift people out of poverty is untrue and will also prove harmful in the long run.