How the New Child Tax Credit May Fall Short

Why the New Child Tax Credit May Fall Short

Having children in the United States is expensive—more expensive than in most other developed nations.

Unlike the United States, many other countries, most notably Scandinavian countries, have robust child welfare systems, including programs that give families direct cash transfers for their children. The benefits received per child in America come out to about $166 per month delivered as a tax credit, but this is dependent upon a certain income level.

In contrast, Norwegian parents receive benefits of $163 per month for every child under 6 and $127 per month for every minor above 6, regardless of income level. Parents also receive an additional child care benefit that starts at $725 per month for children ages 1 to 3, and diminishes with the hours the child is in state-subsidized daycare. Norwegian mothers are allowed 12 months of parental leave, receiving full pay for 48 weeks, and Norwegian fathers are allowed 12 weeks of leave; on the other hand, American parents have no guaranteed family leave. This is a large reason for America’s higher child poverty rate, at 21 percent, than any European country.

With the pressures of raising kids paired with financial pressures, many Americans struggle to get by and have difficulty feeding their family let alone putting their kids through school. The USDA estimates that, on average, $233,610 will be spent per child from birth to age 17, which is difficult for many families to manage. And the main reason given for why many Americans have fewer children than they want to is economic.

On April 28, President Biden announced a plan to relieve American families during the COVID-19 pandemic by modifying the current existing Child Tax Credit (CTC) program. While President Biden’s modification would be a step in the right direction by eliminating the hurdles that prevent many low-income families from receiving benefits; the proposed tax credit will still fall short in its implementation.

Tax credits have recently become one of the main ways that both political parties choose to implement anti-poverty measures, but their structure lends itself to leaving out those in the most extreme poverty. For instance, the CTC and the Earned Income Tax Credit (EITC) are structured so that benefits gradually phase in as income rises before phasing out again after a given income level. This means that if you had children but have no income, then you would see no benefits from either of these programs. In the case of the EITC this is purportedly to increase labor supply by incentivizing non-workers to obtain jobs, though the program’s success at achieving this result seems to be heavily overstated. In the case of both the CTC and EITC, the people who need the benefits the most are unable to gain access to them.

And their parents aside, children are not workers, so it makes little sense to administer benefits to them through a tax credit. It would similarly make little sense to apply a tax deduction scheme to Social Security, unemployment benefits, or disability payments, as the people who receive these benefits, the elderly, unemployed, and disabled do not usually have income.

The Biden administration seems to have acknowledged this in their plan by making a one-time payment through the CTC which would ignore the income phase-ins and increase the base rate of $2000 to $3000 for children between the ages of 6 and 17 and $3600 for children under 6, distributed monthly. This brings the whole concept of benefit phase-ins into question. If the dire circumstances of the pandemic called for them to be done away with, why were they restricted from helping the children who needed them the most in the first place?

The other major problem with implementation of the modified CTC is that it relies on estimated yearly income in advance. This not only places administrative hurdles between families and their benefits, but it lends itself to large clawbacks of benefit money that was received from inaccurate income speculation.

These problems point to a renewed interest in a switch to some sort of direct cash transfer in childcare policy, rather than through the complicated tax refund process. This calls to mind recent proposals for a universal basic income (UBI) where each citizen would receive a monthly benefit from the government, regardless of employment status or income. Such a system could be scaled down to benefit only minors, and indeed the Norweigian child benefit system described above could be used as a model for an American program of this kind.

Additionally, an unconditional child cash transfer system like this could easily be implemented alongside or as a part of a UBI given to everyone regardless of age. And such a system could easily be implemented without using the IRS, as the CTC does. Instead, it could utilize Social Security, which already has a framework for distributing cash transfers.

It would also be possible to emulate some of the conditional cash transfer (CCT) programs that are popular in Latin America and Africa. CCTs put certain conditions on receiving benefits (e.g. parents enrolling children in school, getting them vaccinated, etc). Indeed, studies have shown that CCTs have a positive effect on everything from child educational outcomes to nutritional intake. CCTs may be ideal in America for achieving policy goals other than simple poverty reduction. However, their implementation might reproduce many of the administrative hurdles inherent in the CTC system. If a family is removed from a CCT program for not meeting requirements, then that is a child who would not receive benefits they may need.

The COVID-19 pandemic showed that there is bipartisan support for cash transfers. For one thing, the government writing checks that can be cashed directly into its citizens’ bank accounts indicates that distributing benefits can be done in a more direct, tangible way. In doing so, COVID-19 demonstrated both the weaknesses of programs like the CTC and EITC.
Does the interest in moving towards systems like a UBI, an unconditional child benefit, or a CCT perhaps point towards a failure in the American economy? That is difficult to say, but we can be certain that the COVID-19 pandemic exposed and exacerbated the economic inequality and wage stagnation of the past few decades. The need for a higher minimum wage would immensely benefit working people and their families. But the need for a strong child welfare system, one that sidesteps many of the issues of our current system, should be the cornerstone of any anti-poverty program.